UK Weighs Exemption for Tokenized Gold as London Pushes Into Digital Markets

The UK Financial Conduct Authority (FCA) is considering whether certain tokenized gold products should be exempted from investment-fund regulations, in a move that could make digitally represented bullion easier to use across London’s wholesale financial markets.

The potential changes are expected to form part of a broader effort involving the FCA, HM Treasury and the Bank of England to determine whether tokenized gold and other tokenized commodities require a regulatory framework tailored to their structure.

One option under consideration would create a targeted exemption from rules governing collective investment schemes (CIS) and alternative investment funds (AIFs). The FCA has not reached a final decision and said it remains open to different regulatory approaches.

FCA Examines Rules Around Tokenized Gold

Tokenized gold gives investors ownership rights linked to physical bullion held by an issuer or custodian, while the digital representation can be transferred between holders without moving the underlying metal each time.

Industry participants have argued that uncertainty over the regulatory classification of these products could restrict access for certain types of investors, particularly if tokenized gold falls within existing collective investment or alternative fund regimes.

The FCA is therefore working with HM Treasury to assess whether specific gold products, or the infrastructure supporting them, should fall outside parts of those rules.

The question is particularly relevant for London, where the wholesale gold market already operates at enormous scale and relies on established custody, settlement and trading infrastructure.

Tokenized Gold Could Become Financial Collateral

The regulatory discussion extends beyond making gold easier to trade digitally.

UK regulators are also examining whether physical bullion represented through digital tokens could be used as collateral in financial transactions.

The FCA has discussed tokenized gold standards with banks and other market participants. John Ralley, the regulator’s Director of Infrastructure and Exchanges, identified tokenized gold as one of the areas attracting attention during those discussions and highlighted the need to assess whether existing regulatory frameworks remain suitable for the evolving gold market.

Tokenization could also make bullion easier to divide and transfer through digital markets. That matters because gold differs from securities such as equities and bonds: while much of their trading infrastructure is already digital, gold remains a physical asset that depends on custody, transportation and settlement processes.

A digital representation could allow ownership to change hands without requiring the underlying bars to physically move with every transaction.

London Looks to Tokenize Its Gold Market

The FCA’s focus comes against the backdrop of London's central role in global bullion trading.

According to the World Gold Council, the UK accounts for roughly 70% of global gold trading volumes, giving London an important position in any effort to bring physical bullion further into digital financial infrastructure.

Tokenized gold products already exist outside the proposed UK framework. Tether Gold (XAUT) and PAX Gold (PAXG), for example, issue blockchain-based tokens backed by physical gold.

The two products had a combined market capitalization of approximately $4.4 billion in July, according to the source material.

Regulatory treatment varies between jurisdictions. In the European Union, gold-backed tokens fall within the category of asset-referenced tokens under the Markets in Crypto-Assets Regulation, or MiCA. No token in that category had received approval under the regime as of July.

Gold Tokens Enter the Collateral Market

The FCA and the Prudential Regulation Authority (PRA) have already identified tokenized gold as a potential form of collateral for certain uncleared over-the-counter derivatives.

Regulators are working with market participants on standards governing how tokenized collateral could operate within existing financial rules. The products are also beginning to appear in parts of the digital-asset lending market.

By late August, Aave had reached the $25 million borrowing limit associated with loans against Tether Gold. Arch Lending, meanwhile, had begun accepting PAXG and XAUT as collateral for loans with loan-to-value ratios of up to 75%.

The developments suggest that tokenized bullion is moving beyond a simple digital trading product and toward a broader role within lending and collateral arrangements.

UK Expands Tokenization Push Across Wholesale Markets

The FCA's work on tokenized gold forms part of a wider UK effort to modernize wholesale-market infrastructure through tokenization.

The initiative covers areas including securities, collateral, settlement systems and other components of financial-market infrastructure.

The potential benefits extend beyond faster trading. Participants have identified post-trade processes such as clearing and settlement as areas where tokenization could improve the use of capital and collateral.

A recent study cited by UK regulators found that US market participants hold, on average, 7% more collateral than required, providing an additional buffer against unexpected changes. Industry participants have told UK regulators that digital infrastructure could reduce some of the operational constraints that encourage institutions to maintain such excess collateral.

For wholesale markets, the attraction is therefore not simply putting an existing asset on a blockchain. It is the possibility of making collateral easier to transfer, track and deploy across financial transactions.

UK Tests Digital Market Infrastructure

The UK's work on tokenized assets has been underway for months.

In May, the FCA and Bank of England launched joint consultations covering tokenized securities, collateral, settlement instruments and wholesale-market infrastructure.

The UK's digital securities sandbox has brought together 16 firms to examine how tokenization could reshape securities markets, including the possibility of extending trading hours and developing settlement infrastructure capable of operating around the clock.

The Bank of England is also examining whether tokenized assets, including stablecoins, could eventually be accepted as collateral within its sterling monetary framework, through which it provides liquidity to financial institutions.

The central bank plans to consult later this year on whether central counterparties should be permitted to accept tokenized assets as collateral.

Tokenization Could Reshape How Markets Use Gold

The FCA's interest in tokenized gold points to a larger question about how physical assets can function inside increasingly digital financial markets.

A regulatory framework that gives institutions greater certainty around tokenized bullion could allow gold to become more flexible within collateral, settlement and trading systems without requiring the physical metal to change location every time ownership does.

That could turn some of the operational constraints associated with physical bullion into a digital infrastructure problem rather than a physical logistics problem.

For London, the stakes extend beyond gold itself. A workable framework for tokenized bullion could provide a testing ground for bringing other physical assets into wholesale financial markets, while reinforcing the city's role in developing the next generation of digital market infrastructure.