Gold stablecoins are odd things. Everyone accepts that, in practice, fiat currency often has no physical form. Yes the bank will give you paper money but most transfers occur without any objects changing hands. But the gold market is not only based around yellow bricks held in basements -- it is also jam-packed with people who are worried their bars are missing/fake/lead/stolen/etc.
Further, wholesale markets have had reasonably efficient solutions for trading gold via certificates for decades. Nothing is perfect, and there are surely limitations, but the gold market functions fine day-to-day.
So let's find two gold stablecoins and see if a little knowledge can light our way.
Each token represents 1 oz of LBMA good delivery gold. These are ERC20 tokens so they are very transferable. Loco London gold is also quite liquid but fair enough, ERC20 tokens are more mobile. But digging further into the details these contracts are weird.
To start, there are no storage fees. These are allocated bars in "Brinks' bullion vaults in London" that surely charge fees. Someone is paying the fees. We haven't reviewed the contact between Paxos Trust and Brink's but it's a fair guess that if the fees aren't paid Brink's sells gold to recoup them. Brink's does not provide storage for free. Yes Paxos charges transaction fees for trading the tokens which generate revenue -- but if those fees don't cover the storage costs it is unclear what happens.
A traditional Gold ETF charges fees which go to cover storage etc. For example the prospectus here explains: "[t]his includes (1) selling the Trust’s gold as needed to pay the Trust’s expenses (gold sales are expected to occur approximately monthly in the ordinary course)..." So everyone pays pro rata whatever the storage costs are. That is transparent.
"If you don't pay the storage fees then you loose your gold" is fair enough on a per-account basis. It is an entirely different proposition to be dependent on aggregate market trading generating sufficient fees to cover collective storage costs. For a market packed with hodlers and obsessive about ownership rights this is downright shocking.
This is somewhat mitigated by Paxos offering to redeem tokens by delivering physical gold. Here we move from the shocking to the marketing:
PAX Gold is redeemable in several forms, unlike any gold products available today. Customers can convert their PAX Gold into physical allocated gold, unallocated gold entitlements or fiat.
That may or may not be a useful service but it is not exclusive to Paxos. These folks all offer it. Pretty sure those are mostly (all?) regulated institutions. And nobody does it for free, including Paxos. So you can withdraw your gold but only through a significantly-more-byzantine process than standard LBMA allocated gold today. And it's not like this is free: Paxos still charges creation & redemption fees on tokens when you deposit/withdraw 400oz bars. For smaller amounts the total fees are surely higher. This is further away from "not your keys, not your coins" than the TradFi alternatives.
This one looks basically like LBMA allocated gold today with a bit more mobility weighted against a more complicated process, less direct ownership and some odd untested quirks. If this makes sense, depends upon your point of view.
A similar setup where each token is 1 oz of LBMA gold, this time in a vault in Switzerland. This token has no trading fees and only charges on issuance and redemption. That compounds the problems described above with vaulting costs: it is unclear how Tether can pay storage costs for a significant period given only an issuance fee of 25bp.
This is again an ERC20 token and so it is quite mobile. Swiss-delivery gold isn't really as large a market as London, nor is it clear precisely which gold Tether is offering. LBMA good delivery is a standard for bars but requirements to get into vaults are more onerous. One cannot simply rock up with a bar of unknown provenance and deposit it for good delivery. The Swiss market is more fragmented than London.
But things start to get really weird the deeper we dig here. The Tether "parent company" is Tether Holdings in HK. LEI reference here. Roughly speaking to be a part of the TradFI system you need a Legal Entity Identifier. Paxos has one. But the Tether whitepaper is written in the name of "Tether Operations Limited" which has only a lapsed LEI from 2018 in the BVI. Tether Holdings is incorporated in HK and shows up on their registry.
Maybe this is just a clerical error by Appleby as the Operations business is registered to their address. But the whitepaper is quite clear on the legal structure of the tokens:
A new entity, TG Commodities Limited (Tether Gold), digitizes the value of gold using the new token, XAUt.
This company does not have an LEI, nor does it appear on any registry we can find. Amusingly there is a "T G Commodities Limited" which a space between "T" and "G" registered in the UK. One of the directors is Sanjeev Gupta (yes, that one) and it was previously called "Liberty NFM Limited." Here is the official record. We expect this is just a weird coincidence as that company was first formed in 1998 and the spelling does not match.
Anyway there is no record of the Tether-referenced company which holds the gold existing anywhere. And before someone suggests these records are not relevant as this is DeFi: gold in a vault in Switzerland is OG-TradFi. And the grizzled Swiss vault operator surely needs someone to bill for storage.
Maybe none of this matters as long as there are gold bars somewhere, in a vault, with storage costs getting paid. Tether provides a nice lookup tool to match bars -- well, shares in bars -- to tokens here. It's all public so we can check a few addresses. First find large holders at etherscan. Then paste some addresses into the scanner. Many wallets don't match. This is not a high-volume token so it's unlikely these are timing issues.
To given a sense of scale the largest holder at the time of this writing is "Bitfinex 3" with ~42k oz per etherscan and ~36k oz per the "Gold Allocation Lookup." The second largest holder is "Bitfinex 2" and that is near matching (27,990 vs 27,981 oz). Choosing random other addresses and you see many mismatches. Who knows. Reliable immutable public records these are not.
The total at etherscan.io does match, exactly, the total issuance per the transparency report. Now this is interesting. The transparency report breaks out the "ready for sale" tokens:
Specific gold bars will be associated with each on-chain address that holds XAUt tokens. Tether Gold will make a “Look-up Website” available where anyone can identify the specific gold bar(s) associated with each on-chain address where XAUt tokens are held.
When an on-chain transaction transfers XAUt from its initial on-chain address (A) to a second on-chain address (B), the Tether website will reflect that some of the physical gold previously associated with A moved to B. Gold associated with other on-chain addresses won’t be impacted by this transaction. Where needed (e.g., to support a redemption or to mitigate fractionalization), the physical gold associated with the XAUt held at on-chain addresses can be consolidated. This reallocation will happen instantly so that each XAUt token will always represent ownership of physical gold on a particular gold bar.
Maybe this is a bit old-fashioned but if a token shows up on etherscan.io it's on-chain right?
This is not the only address where we observed a non-zero balance and no physical gold listed on the "Look-up Website." Confused reporting clouds everything, impossible to see, the correct balances are.
These two coins are not quite the same. But both share weird features that no hodling goldbug would want! Yes, the ability to transfer tokens easily is an improvement over physical bars...but this is a market where all manner of conspiracy theories run wild. If you believe the Fed -- or ECB or Trilateral Commission or whoever -- is faking gold records why would you want anything to do with this? If you believe JPM London is selling unbacked futures to push down the price of gold why would you want to mutualize your storage costs with anonymous other hodlers?
If the US treasury put out an errant press release missing a 0 in total precious metals holdings the community would go wild and never let it go. But the documentation associated with these gold stablecoins -- and XAUt in particular -- is riddled with oddness. Oddness leads to confusion. Confusion leads to losses. Losses lead to suffering. This market badly needs some light.