The UK Financial Conduct Authority considers providing regulatory exemptions for tokenized gold prod

The UK's Financial Conduct Authority considers exempting certain tokenized gold products

The UK's Financial Conduct Authority (FCA) is considering whether to exempt certain tokenized gold products from existing fund rules. Regulators are reviewing with the Treasury and the Bank of England on how to make it easier to use digital gold bars in London's wholesale financial markets.

Regulatory framework exploration

The FCA is evaluating whether certain tokenized gold products should be exempted from UK Collective Investment Scheme (CIS) and Alternative Investment Fund (AIF) rules. Currently, regulators are working with the Ministry of Finance and the Bank of England to study a dedicated framework for tokenized gold, but no final decision has been made.

UK regulators are studying whether tokenized gold bars can make it easier for physical gold to be divided, transferred and used as collateral in financial markets. At the same time, the Bank of England is also considering whether tokenized assets, including stablecoins, meet the eligible collateral standards under its sterling monetary policy framework.

The FCA will announce potential changes on Monday as part of its collaboration with the Treasury and the Bank of England to explore whether tokenized gold and more broadly tokenized goods require a dedicated regulatory framework. One option to consider is a targeted exemption from rules covering pooled investment plans and alternative investment funds. FCA officials said regulators had not yet made a decision and were open to different options.

Industry Background and Challenges

Tokenized gold represents ownership of physical gold bars held by the issuer or custodian. These digital tokens can be transferred among investors, while the underlying gold continues to be stored in the vault.

Industry participants reported to the FCA that there is uncertainty as to whether such products fall within the Collective Investment Plan (CIS) or Alternative Investment Fund (AIF) framework, which may limit the range of investors who can access the product.

Regulators plan to work with the Department of Finance to assess whether certain tokenized gold products or related market infrastructure should receive specific exemptions from the scope of CIS and AIF regulations. The proposal builds on previous discussions between regulators and financial institutions. It has been previously reported that the FCA has held discussions with major banks and other market participants on the tokenized gold standard, including exploring the potential use of digital gold bars as collateral.

Jon Relleen, head of infrastructure and exchanges at the FCA, said that tokenized gold has become an area of much attention in discussions with the industry. "We are eager to understand whether the existing regulatory framework is still appropriate for the gold market and how innovation can enhance the efficiency and competitiveness of the UK market." Relleen said.

Improve market efficiency

FCA believes that tokenization is expected to make gold easier to divide and transfer through digital markets. Unlike stocks and debt securities that are already circulated through established electronic infrastructure, gold bars are still physical assets and involve operational requirements such as storage, custody and transfer.

London dominates the international gold bar market. According to the World Gold Council, the UK accounts for about 70% of global gold trading volume, while China is working to consolidate its position as a gold bar trading center.

In fact, tokenized gold products have developed outside the proposed framework in the UK. Global markets include products such as Tether Gold and Pax Gold, which issue blockchain-based tokens backed by physical gold bars. In July this year, the combined market value of these two products was approximately US$4.4 billion.

Regulatory treatment varies between jurisdictions and products. According to the European Union's Cryptographic Asset Markets Regulation (MiCA), gold-backed tokens fall into the asset reference token category, although as of July, no asset reference token has been approved under the system.

Unleashing collateral potential

UK regulators are not only focusing on transaction access, but are also examining whether tokenized gold bars can make physical gold easier to use as collateral in financial transactions.

The FCA and the Prudential Regulation Authority (PRA) have previously identified tokenized gold as a potential collateral asset for uncleared over-the-counter derivatives. Regulators have been working with industry to develop standards on how tokenized collateral can operate within existing financial rules.

Currently, in some areas of the digital asset market, gold-backed tokens have been used as collateral. As of late August, Aave's $25 million debt limit for borrowing Tether Gold has been fully utilized, and Arch Lending has also begun accepting tokenized gold as collateral for loans through PAXG and XAUT, with loan-to-value ratios of up to 75%.

The FCA's planned reforms will focus on the UK wholesale market and its existing bullion infrastructure, where large reserves of physical gold are stored. Regulators believe that tokenization could make it easier to divide and transfer some reserves at the digital level, potentially allowing gold bars to enter mortgage arrangements without involving the same operating processes required to transfer physical gold bars.

Bank of England considerations

The Bank of England and the FCA are expected to release a separate document on Monday outlining industry feedback on tokenization applications in wholesale markets. Regulators note that market participants have identified post-transaction processes such as clearing and settlement as one of the main areas for tokenization to release capital and collateral.

New research cited by authorities found that average U.S. market participants held 7% more collateral than required as an additional safety buffer. Industry participants have told UK regulators that digital infrastructure can reduce some of the operating restrictions that lead to holding excess collateral.

Construction of related infrastructure has been going on for several months. In May this year, the FCA and the Bank of England jointly launched a consultation covering tokenized securities, collateral, settlement instruments and wholesale market infrastructure. There were 16 companies participating in the UK digital securities sandbox at the time, and regulators were looking at the possibility of extending operating hours and ultimately achieving a settlement infrastructure that was operating near 24 hours a day.

Currently, the Bank of England is considering whether tokenized assets, including stablecoins, qualify as collateral under its sterling monetary policy framework, which provides liquidity to financial institutions. The central bank plans to consult later this year on whether to allow central counterparty clearing houses to accept tokenized assets as collateral.

The overall digitalization process

Collateral reform is advancing in parallel with other UK tokenization projects involving government debt and payments. In July this year, the government selected HSBC's Orion platform for its first digital sovereign bond, and the first digital gilt bond instruments are expected to be issued before the end of the first quarter of 2027.

The tool is expected to operate within the FCA and Bank of England's digital securities sandbox. The government said that if the initial issuance goes as planned, more digital gilt bond sales may follow.

British authorities have been reviewing the combination of tokenized currencies and securities. Sarah Breeden, deputy governor of the Bank of England, said in May that the country's future payment infrastructure would be able to accommodate tokenized bank deposits, regulated stablecoins and potential central bank digital currencies (CBDCs). Since then, the central bank has continued to test how different types of digital currencies interact with existing financial infrastructure, while maintaining settlement in central bank currency.

For tokenized gold, the current regulatory issue remains: whether existing fund rules should apply to digital representations of gold in the same way as they apply to investment structures under the framework of Collective Investment Plans (CIS) and Alternative Investment Funds (AIF).

The FCA will present its proposal on Monday, and any targeted exemptions will require further consultation with the Ministry of Finance before changes in the scope of regulation can be introduced.