21 March 2024
How will Blockchain benefit the transportation of gold?
Gold's association with money, status, power, and immortality spans cultures worldwide. From black gold (oil) to white gold (double glazing), the precious metal is commonly added as a suffix to indicate an entity’s value.
From pirates on the high seas to 20th-century gold heists, the transportation of a commodity as valuable as gold has always faced considerable threats. Even today, International NGO Global Witness reports that conflict, human rights abuse and environmental problems are still connected to the gold supply chain.
It can be challenging to trace the origin of gold once it enters the market. This is especially true at the refining stage, where there is vast potential for batches to be mixed and melted together, making it theoretically impossible to distinguish the exact origin of one gold bar from another.
Efforts have been made to address this issue, such as the implementation of responsible sourcing initiatives and certification schemes. However, it remains a persistent challenge to completely eliminate conflict gold from the legitimate market.
Yet the growth of the e-commerce market is driving demand for innovation in gold transportation. More people are buying gold online, and there is an increased need for secure and efficient transportation methods to deliver gold to customers. The introduction of blockchain has the potential to rectify this and revolutionise the insurance market for gold transportation.
Blockchain: revolutionising transportation security
What is Blockchain?
In very simple terms, blockchains are distributed databases that store and share information between a group of individuals. A blockchain acts as a digital ledger that records transactions across multiple computers or nodes. Its primary attributes are transparency, security, and tamper resistance. Every transaction is grouped into a block and added to a chain of previous blocks, creating a secure, chronological, and unchangeable record of all transactions. Although it is widely associated with cryptocurrencies like Bitcoin, blockchain technology has a plethora of other potential applications, such as supply chain management, voting systems, and smart contracts.
Blockchain benefits
Most important for the transportation of gold, blockchain provides a transparent and auditable trail of transactions, making it easier to track and verify the origin and movement of assets. This is particularly useful in supply chain management, where it can help prevent fraud, and counterfeiting, and ensure product authenticity.
Blockchains provide a transparent and immutable record of transactions. They operate on a decentralised network, meaning there is no central authority controlling the system. All participants in the network have access to the same information, which increases trust and reduces the need for intermediaries.
Due to the use of advanced cryptographic techniques to secure transactions and data, once a transaction is recorded on the blockchain, it is extremely difficult to alter or tamper with.
The technology eliminates the need for manual reconciliation and paperwork, streamlining processes and reducing costs. It also enables faster and more efficient transactions, reducing the time required for settlement.
Blockchain provides a transparent and auditable trail of transactions, making it easier to track and verify the origin and movement of assets.
Blockchain-related risks
Despite the obvious advantages, there are risks to blockchain that must be considered. Blockchain networks are not immune to security breaches. While the technology itself is considered secure, vulnerabilities can still exist in the implementation, smart contracts, or the underlying infrastructure. Hacking attempts, malware, and phishing attacks can compromise the security of blockchain systems.
The regulatory landscape surrounding blockchain is still evolving. Different jurisdictions have different regulations, and compliance requirements can be complex. Uncertainty in regulations can pose risks to businesses operating in the blockchain space, especially in areas such as data privacy, anti-money laundering, and consumer regulations.
Blockchain networks can face scalability challenges, especially in public blockchains. As the number of transactions increases, the network can become slower and more expensive to use. This can limit the scalability of blockchain applications and hinder their widespread adoption.
Blockchain networks often rely on decentralised governance models, where decision-making is distributed among network participants. However, achieving consensus and making decisions can be challenging, leading to potential conflicts of interest or power struggles among participants.
Smart contracts, which are self-executing contracts on the blockchain, can introduce legal risks. The enforceability of smart contracts and the legal remedies available in case of disputes are still being explored. In some cases, the terms of a smart contract may not align with existing legal frameworks, leading to potential legal challenges.
Blockchain networks often operate in silos, making it difficult for different networks to communicate and share data. Lack of interoperability can limit the potential benefits of blockchain technology and hinder its adoption in certain industries.
There is a clear argument that blockchain will benefit the transportation of gold. It can rectify the current issues relating to gold being sourced from conflict zones or organised crime and entering the legitimate market by providing a clear and secure transaction history that all parties in the supply chain can rely upon.
However, for blockchain to be effective in the longer term, it needs all stakeholders to actively participate, both in the technology at hand and, in the case of gold transportation, the wider endeavours relating to responsible sourcing. The challenges of integrating the technology with existing systems should also not be underestimated. It is no surprise that the LMBA is taking cautious care with the development of its digital ecosystem.
Is Blockchain technology already being used to track the movement of gold?
The London Bullion Market Association (LBMA) and the World Gold Council are collaborating to develop a digital system to monitor the gold supply chain. In September, they launched a request for proposal (RfP) for a digital ecosystem “that will provide trust and confidence to support the integrity of the market and the gold that underlies it”.
The request is the next logical step from the group’s Gold Bar Integrity Programme last year, which piloted the use of a blockchain-based ledger to record the transaction history of gold bars from mine to vault.
The industry-wide move follows a wider collaboration to use blockchain technology to help improve operational efficiencies, logistics and financing in the high-value mineral concentrates supply chain. One ongoing project, which launched in 2019, involves Goldcorp, ING Bank, Kutcho Copper Corp, Ocean Partners USA, and Wheaton Precious Metals working with mining technology company MineHub to build the new mining supply chain solution on top of the IBM blockchain platform.
What does Blockchain mean for gold insurance?
Let's talk
Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.