UK FCA weighs regulatory exemption for tokenized gold products

The UK Financial Conduct Authority has considered exempting certain tokenized gold products from existing fund rules as regulators examine how digital bullion could be used more easily across London’s wholesale financial markets.

The Financial Conduct Authority will set out the potential changes on Monday as part of work with the Treasury and Bank of England on whether tokenized gold, or tokenized commodities more generally, need a dedicated regulatory framework.

One option under consideration is a targeted exemption from rules covering collective investment schemes and alternative investment funds. No decision has been made, and FCA officials have said the regulator remains open to different approaches.

Tokenized gold represents ownership rights over physical bullion held by an issuer or custodian. The digital tokens can then be transferred between investors while the underlying gold remains in storage.

Industry participants have told the FCA that uncertainty over whether such products fall within the collective investment scheme, or CIS, and alternative investment fund, or AIF, frameworks could restrict which investors can access them.

FCA could exempt tokenized gold from fund rules

The regulator plans to work with the Treasury to assess whether certain tokenized gold products or related market infrastructure should receive a specific exemption from the CIS and AIF regulatory perimeter.

The proposal builds on discussions that were already taking place between regulators and financial institutions. In August, crypto.news previously reported that the FCA was discussing tokenized gold standards with major banks and other market participants, including potential uses for digital bullion as collateral.

Jon Relleen, the FCA’s director of infrastructure and exchanges, said tokenized gold had emerged as an area of interest during the regulator’s discussions with the industry.

“We’re keen to understand whether existing regulatory frameworks remain the right fit for gold markets and how innovation could strengthen the efficiency and competitiveness of UK markets,” Relleen said.

The FCA sees a potential role for tokenization in making gold easier to divide and transfer through digital markets. Unlike shares and debt securities, which already move through established electronic infrastructure, bullion remains a physical asset with operational requirements around storage, custody and transfers.

London holds a dominant position in the international bullion market. The UK accounts for around 70% of global gold trading volumes, according to the World Gold Council, while China has been working to strengthen its own position as a bullion trading center.

Tokenized gold products have already developed outside the UK’s proposed framework. The global market includes products such as Tether Gold and Pax Gold, which issue blockchain-based tokens backed by physical bullion. The two products had a combined market capitalization of roughly $4.4 billion in July.

Regulatory treatment differs between jurisdictions and products. Under the European Union’s Markets in Crypto-Assets regulation, gold-backed tokens fall within the asset-referenced token category, although no asset-referenced token had received approval under that regime as of July.

Tokenized gold could unlock bullion for collateral

UK regulators are looking beyond trading access and examining whether tokenized bullion could make physical gold easier to use as collateral in financial transactions.

The FCA and Prudential Regulation Authority had previously identified tokenized gold as a possible collateral asset for uncleared over-the-counter derivatives. Regulators have been working with the industry on standards governing how tokenized collateral could operate within existing financial rules.

Gold-backed tokens are already being used for collateral in parts of the digital asset market. By late August, Aave’s $25 million debt ceiling for borrowing against Tether Gold had been fully used, while Arch Lending had started accepting tokenized gold through PAXG and XAUT for loans at loan-to-value ratios of up to 75%.

The FCA’s planned reforms would focus on the UK wholesale market and its existing bullion infrastructure, where large physical gold reserves are held in London.

Regulators believe tokenization could make some of those reserves easier to divide and transfer digitally, potentially allowing bullion to move through collateral arrangements without requiring the same operational processes involved in transferring physical bars.

The planned consultation forms part of the UK’s work on tokenizing wholesale financial markets, including securities, collateral and settlement infrastructure.

Bank of England considers tokenized assets as collateral

The Bank of England and FCA are expected to publish a separate paper on Monday setting out industry feedback on the use of tokenization in wholesale markets.

Market participants identified post-trade processes such as clearing and settlement as one of the main areas where tokenization could free capital and collateral, according to the regulators.

Recent research cited by the authorities found that U.S. market participants held an average of 7% more collateral than required as an extra safety buffer. Industry participants told UK regulators that digital infrastructure could reduce some of the operational constraints that contribute to excess collateral being held.

Work on that infrastructure has been underway for several months. The FCA and Bank of England opened a joint consultation in May covering tokenized securities, collateral, settlement tools and wholesale market infrastructure.

Sixteen firms were participating in the UK Digital Securities Sandbox at the time, with regulators examining longer operating hours and eventually settlement infrastructure capable of functioning close to around the clock.

The Bank of England is now considering whether tokenized assets, including stablecoins, could qualify as collateral under its Sterling Monetary Framework, through which it provides liquidity to financial institutions.

The central bank plans to consult later this year on whether central counterparty clearing houses should be allowed to accept tokenized assets as collateral.

UK moves more wholesale assets onto digital infrastructure

Collateral reform is developing alongside other UK tokenization projects involving government debt and payments.

The government selected HSBC’s Orion platform in July for its first digital sovereign bond, with the initial Digital Gilt Instrument targeted for issuance by the end of the first quarter of 2027.

The instrument is expected to operate inside the FCA and Bank of England’s Digital Securities Sandbox. The government has said further digital gilt sales could follow the first transaction if the initial issuance progresses as planned.

UK authorities have been examining tokenized money alongside securities. Bank of England Deputy Governor Sarah Breeden said in May that the country’s future payment infrastructure could accommodate tokenized bank deposits, regulated stablecoins and potentially a digital pound.

The central bank has since continued testing how different forms of digital money could interact with existing financial infrastructure while maintaining settlement in central bank money.

For tokenized gold, the immediate regulatory question remains whether existing fund rules should apply to digital representations of bullion in the same way they apply to investment structures covered by the CIS and AIF frameworks.

The FCA will present its proposals on Monday, while any targeted exemption would require further work with the Treasury before changes to the regulatory perimeter could be introduced.