Written by: Thejaswini M A
Compiled by: Saoirse, Foresight News
In February 2025, amid market expectations of imminent US tariff policies, traders scrambled to withdraw gold from the Bank of England's vaults for shipment to New York. The wait time for gold bar withdrawals stretched from days to 4-8 weeks, with all appointment slots fully booked.
Dave Ramsden, Deputy Governor for Markets at the Bank of England, told reporters that the process of entering the building that morning was particularly cumbersome due to a freight truck parked in the gold and silver vault area.
The London gold market primarily trades ownership certificates of gold, while the physical gold rests securely in vaults. However, during that period of uncertainty, the withdrawability of gold directly affected its price: gold held in the Bank of England's name traded at a discount due to weeks-long withdrawal queues; gold held in commercial vaults commanded a premium, as buyers were willing to pay extra for the ability to withdraw and transport physical gold immediately.
On an ordinary trading day in May, the banks responsible for London gold clearing handled intraday trading volumes of $73.7 billion, all without moving a single ounce of physical metal. By the end of July, London vaults held 9,534 tonnes of gold, valued at $1.2 trillion, equivalent to roughly 762,000 bars. Clearing institutions note that this is simply how the system operates—moving physical gold is prohibitively expensive and comes with security risks.
This article explores why the UK's Financial Conduct Authority (FCA) is developing regulatory rules for tokenized gold, and why the proposed legislation focuses almost entirely on the ledger system.
London is the global hub for gold trading. The London Bullion Market Association (LBMA) is the industry trade body and also sets standards. Final settlement of debts and credits between trading parties is handled by four clearing banks: HSBC, ICBC Standard Bank, JPMorgan Chase, and UBS. The electronic matching and clearing agency operated by these banks is the London Precious Metals Clearing Limited (LPMCL, also known as AURUM).
@lbma
The FCA has been in discussions with major banks about how to regulate tokenized gold and whether such assets can be used as collateral in wholesale markets. Prior to this, the FCA, the Bank of England, and the Prudential Regulation Authority jointly issued a report on May 18, 2026, suggesting that tokenized gold could serve as collateral for non-cleared over-the-counter derivatives, citing existing precedents in related areas.
In April, the FCA issued a policy statement confirming that various money market funds, including tokenized funds, are eligible to be used as collateral for non-cleared transactions under the UK version of the European Market Infrastructure Regulation (UK EMIR).
Currently, 16 institutions in the UK are conducting tokenization-related pilots within the regulatory sandbox. The UK government estimates that by 2035, tokenization technology could add £33 billion annually to the UK economy. The first tokenized government bond is expected to launch in early 2027, coinciding with an upgrade of the Bank of England's collateral system; by 2028, various digital ledgers are expected to interconnect with a potential digital pound.
A common view is that London's push for gold tokenization stems from fears of business migrating to Asian markets. However, the reality is that this technology was developed in-house by London's own clearing banks. In late 2023, HSBC began splitting standard 400-ounce gold bars in its London vaults into smaller digital fractions for easier trading by institutional investors. It later launched a retail version in Hong Kong, accumulating $2.2 billion in trading volume, but this innovation originated in London.
The London gold market serves four core functions: The first two are physical storage (vaulting and security) and quality verification. Quality verification ensures gold purity meets standards, so buyers don't need to melt and re-test the metal.
Tokens obviously cannot perform these two functions; they must rely on physical infrastructure. The third function: recording gold ownership. Tokens excel at this, offering a low-cost solution, a point widely agreed upon.
The fourth function is credit provision, and this is the crux of the matter. Gold tokenization could render the existing bank credit system obsolete. With tokens, ownership of physical gold can be transferred instantly, meaning investors no longer need to entrust their gold to banks in exchange for convenient trading channels.
The vast majority of gold in the London market is held and traded in unallocated accounts. Clients do not own specific bars but have a general claim on a corresponding amount of gold. The LBMA compares this model to a bank deposit denominated in ounces. Clients are unsecured creditors of the clearing member. The gold in vaults is consolidated onto the banks' balance sheets, keeping the trading system running. Banks can book transactions immediately, allowing several days for the back-office settlement of physical delivery.
Buyers have two choices: First, claim specific physical bars, which incurs storage fees and involves slow asset transfers. Second, hold unallocated gold, which is essentially a bank IOU. Investors bear the bank's credit risk, but transactions are instantaneous. The vast majority of market participants choose the second option. In February, the average trade size was equivalent to about 5 bars, and under this mechanism, the gold never left the vault.
What changes under a tokenized model? A token combines the trading speed of an IOU with the title enforceability of a specific physical bar. When both advantages are present, investors have little reason to bear bank credit risk. The London market is already highly electronic, so merely upgrading settlement technology isn't the biggest change.
The FCA's priority on collateral use over trading scenarios is because collateral operations heavily depend on speed. Margin calls often have tight deadlines. The traditional gold settlement system is too slow, leaving $1.2 trillion worth of gold in London vaults unusable as collateral, forcing institutions to use cash or UK government bonds instead. Regulators recognize that recording gold ownership on a ledger (on-chain) can solve this pain point: ownership can be split and transferred instantly and precisely, unlocking all vaulted gold as high-quality collateral.
Comparing three ways of holding gold in London vaults: Allocated gold has physical ownership but slow transfers; Unallocated gold offers fast transfers but holders are bank creditors bearing credit risk; Tokenized gold combines physical ownership with instant transfer capability, eliminating bank credit risk.
Similar solutions already exist in the securities industry. The HQLAX service enables major institutions like BNP Paribas, Clearstream, and JPMorgan to trade ownership of collateral without moving the underlying physical assets. The US Securities and Exchange Commission even approved, in May 2026, allowing US broker-dealers to connect to such platforms for a 36-month pilot.
The seeds of this transformation were sown long before the rise of cryptocurrency, originating in stringent banking regulations. When global regulators introduced the Basel III Net Stable Funding Ratio (NSFR) rules, they classified unallocated gold accounts as illiquid assets, requiring banks to hold an 85% stable funding buffer. The London precious metals industry protested vehemently, warning that clearing banks might exit the market. Now, tokenization technology is completing the transformation initiated by Basel III.
I have one concern: the very banks that once fiercely defended the old system are now driving this technology's adoption.
The business of storing 12.5kg gold bars in a vault was not previously within the FCA's regulatory perimeter; but holding a gold token in the future will require full regulatory authorization.
The legal landscape changed in February when the UK Parliament passed a new crypto-asset regulatory framework. The FCA now formally regulates crypto-asset custody and trading platforms. Firms have a 5-month window from September 30 to submit authorization applications, with the full set of regulations taking effect in October 2027. Rules are still being refined, with the FCA continuously updating its client asset custody rules, and lawmakers attempting to extend traditional market exemptions to the token space.
style="text-align: left;">The underlying physical gold itself remains unchanged; vaults, insurance, and security personnel continue their operations as usual.However, once ownership records take the form of tokens, the activity immediately falls under regulatory oversight. This is precisely the boundary drawn by regulators: the focus of regulation is the legal rights associated with the gold. Tokens transfer ownership in a novel way, hence the FCA must introduce new regulatory rules.
If the cost of record-keeping is compressed to near-zero by software, value flows directly to the scarce physical asset. The London vaulting business has extremely high barriers to entry, with only four clearing banks and three security transport companies, and no new entrants for over a decade. Tokens won't disrupt these physical service providers; code cannot replicate a physical vault's security. In fact, tokens may elevate the importance of physical custodians, as every digital certificate must be backed by physical custody services. These firms simply need to adjust their business models, shifting revenue from client gold deposits to standardized fees for storage, auditing, and collateral-related services.
The concept of tokenizing London gold is not new. Paxos and Euroclear attempted an initiative as early as 2016, which shut down after 13 months of operation. What makes the current model viable is that the driving force is now the major clearing banks themselves, not external startups trying to force a technological solution.
Take HSBC as an example. The bank built its own proprietary system to handle all transactions, creating a closed ecosystem and controlling the pace of transformation. The ultimate direction of this market change depends on the FCA. The regulator faces a crucial decision: will it allow HSBC-issued gold tokens to circulate outside the HSBC system? If regulators permit circulation, the market structure could be completely reshaped; if they prohibit it, the old bank model will simply continue with a new facade.
How can we tell if tokenization has truly taken hold? We can track the transition through publicly available LBMA data.
The LBMA publishes two sets of data: total market turnover and clearing volumes through the traditional central ledger. If tokens are widely used, total turnover will remain high as investors continue buying and selling, but traditional clearing volumes will decline. This is because token transactions are settled instantly on the blockchain, completely bypassing London's traditional clearing system.
For now, the old system still handles massive volumes. The clearing ledger sees ownership changes for about 20 million ounces of gold daily, while approximately 306 million ounces sit idly in vaults. This means that on a typical day, for every 15 ounces of gold in London vaults, about 1 ounce changes hands purely on paper, without a single bar moving.
We created mathematics, cryptography, and global networks, only to circle back to the gold quietly resting in underground vaults, didn't we?
