Goldcorp, IAMGOLD, Agnico Eagle among early investors
Digital technology is well on its way to impacting the mining industry through automation and decision-making based on real-time information. Now, it’s also being leveraged to streamline gold trading.
In March, Tradewind Markets Inc. launched a platform called VaultChain to facilitate the trading, settlement and ownership of physical gold. It’s described as a “tailored blockchain application that digitizes vaulted precious metals, removing technical and frictional limitations from the physical gold market.”
A finalist at the 2017 Disrupt Mining Dragon’s Den-style competition in 2017, Tradewind Markets, a spinoff of New York-based IEX Capital, has attracted the attention of Goldcorp, IAMGOLD, Wheaton Precious Metals, Agnico Eagle Mines and Sprott Inc., all of whom have invested in the company.
VaultChain will link gold miners, dealers, manufacturers and investors in an online platform, allowing them to conduct business more efficiently, securely and at less cost. The Royal Canadian Mint will provide storage for VaultChain, confirm that it’s in possession of the physical gold and guarantee the option of physical delivery. Through VaultChain, investors will be able to purchase fractional quantities of gold.
Sudbury Mining Solutions Journal spoke with Fraser Buchan, one of three co-founders of VaultChain, about the significance of the platform and how it will impact the gold market. Following is an edited transcript of the interview.
SMSJ: How is gold traded today and what will change with VaultChain?
Fraser Buchan: In the physical investment silo, gold is sold through eCommerce platforms and through physical locations like the gold desk at Scotiabank, for example. It’s quite analog and for most investors it’s quite expensive.
Physical products typically retail for a five to eight per cent premium to spot and then there’s the added complication and cost of finding a vault to store it and insure it. It’s quite a difficult and expensive way to invest in physical metal. On the institutional side of the business, there are quite a few ways to trade exposure to metal. There’s the London Over the Counter Market…and the COMEX futures market (none of which are fully backed by metal).
A spot market for physically settled metals trading doesn’t really exist, or it exists in very small locations that aren’t particularly relevant to global gold trading. That’s what we see as a fundamental opportunity for VaultChain. It’s to migrate trading from all these different silos onto a very transparent, low cost, easy-to-connect-to electronic environment, allowing the gold market to look more like a stock market and less like an over the counter, telephone, instant message, email market.
SMSJ: What is VaultChain’s relationship with the Royal Canadian Mint?
FB: The Royal Canadian Mint is the gateway for physical metal entering and exiting the environment. To use a simple example, a customer of the Mint deposits physical gold. The Mint registers it on our platform – the blockchain – at which point it becomes a tradable asset in our marketplace. Instead of actually needing to physically ship the metal and settle a transaction, or needing to identify the metal in some format or location, you can actually trade the digital records of ownership and the Mint then recognizes all of the accounts in our blockchain as a source of truth for who owns the metal in their vault.
(Investors) can have their gold physically delivered…(but) the cost of holding metal in our program is so low that I don’t see a good reason why anyone would want to take physical delivery. You’d then have to find a location to vault it…
SMSJ: How does VaultChain increase the utility of gold?
FB: One of the big issues in the physical market now at an institutional level is that gold is not particularly useful as a collateral asset. For large physical dealers, it’s capital consumptive to hold physical gold positions. The amount of money you need to hold against physical gold positions is quite punitive. The reason for that is that gold doesn’t trade as a fungible asset, but in different formats in different locations…
What our technology does is it turns all those distinct products into generic digital ounces that are perfectly fungible. They’re all traded in the same location and they’re transferable. It dramatically simplifies that environment and we think over time will alleviate some of the capital constraints of the physical market.
Also, one of the core attributes of blockchain technology relates to payments and remittances, so creating connectivity between all these physical market participants creates an opportunity to transfer value instantaneously as physical gold…This, over time, will lend itself to making gold more useful in payments and remittances. That’s what we mean when we speak to increased utility.
SMSJ: How will VaultChain benefit gold mining companies?
FB: Today, when Goldcorp, for example, wants to sell metal, there are two or three ways they can do that. It’s over the phone and it’s to large, global bullion banks. There’s no electronic quotations. It’s a purely manual process and there’s no transparency whatsoever in pricing. There’s no ability currently for Goldcorp to access the massive spectrum of buyers. There’s no way for a retail gold purchaser to interact with Goldcorp directly. We’re trying to change that. By having this central trading hub, we want to establish over time something that looks much more like a robust equities market.
SMSJ: Will individual investors be able to buy gold directly from Goldcorp?
FB: That’s the ultimate objective. In the equities world, that’s called sponsored access. Retail investors can go into an equities market and directly transact through an umbrella provided by somebody like Charles Schwab. That’s a very mature market that has developed over time, but ultimately that’s where we’d like to get to as well, where the market is defined by the supply and demand of the entire spectrum of the people who are participating.
SMSJ: How does an organization or individual sign up for VaultChain?
FB: We have a number of dealers who are integrated with the platform. Currently, we have Dillon Gage, Kitco and NABX. We expect that the network of dealers will grow over time…By the end of the year, we’re expecting to have between 12 and 15 dealers plugged into the environment. The signup process depends on the role you want to play in the environment, but there are two fundamental requirements. One is to have an account with the Royal Canadian Mint. The second is to sign our subscriber agreement.
SMSJ: Will VaultChain affect the price of gold?
FB: The short answer is yes…. What I would ultimately like to see is a global physical market where all trades are backed by metal, where pricing is driven by executable quotes and by the true dynamics of supply and demand. That doesn’t exist today and I would argue that under these circumstances, you could see gold benefit.
SMSJ: How does VaultChain make investing in gold more cost effective?
FB: Physical investment products typically have two commercial touchpoints. One is storage and the other is management fees. Because we are not an ETF and because our technology doesn’t require an overarching corporate entity to manage it, there are no management fees. On the storage side, we have developed a really productive relationship with the Royal Canadian Mint. We’ve been able to deliver a cost-free product, so the only commercial touchpoint, the only cost to the end investor is trade execution and any premium a dealer may charge for accessing the market.
To give an example, if you open an account with Kitco, Kitco can source liquidity on our marketplace and then sell positions to its customers. That’s a commercial arrangement between Kitco and its client. But if you look at the suite of investment products out there, this costs a fraction of what an ETF product costs, and it’s a dramatic change from the cost structure of coins, bars and wafers.
SMSJ: Is VaultChain operational now?
FB: Yes. We launched in March. It’s still early days. Our initial deposit was little over 3,000 ounces from Goldcorp. Over the next several months, I think we’re going to see liquidity building as more institutions come on board.
SMSJ: How did the idea for VaultChain materialize?
FB: The idea was born out of the maturation of exchange technology and blockchain. (We saw) a remarkable opportunity that hasn’t existed in the past to streamline (gold trading)… Two co-founders were working at IEX Capital, our parent company. We were spun out of their venture group. I was initially a consultant to the company. I helped them think about some of the issues in the physical market.
SMSJ: How impactful was your participation in Disrupt Mining?
FB: Very. Extremely. Our partnership with Goldcorp, IAMGOLD, Wheaton Precious Metals and Agnico Eagle has been a critical factor in us being able to engage with some of the large market participants. Their endorsement lends a huge amount of credibility to what we’re doing.
SMSJ: Are you looking for other gold miners to come on board?
FB: Goldcorp, IAMGOLD, Wheaton and Agnico Eagle have invested in the business, but we’re working with a much wider network of participants to use the platform. Widening the scope of distribution points for producers can only benefit their ability to extract price and to increase liquidity.
SMSJ: You’re originally from Toronto and have returned home to open an office there. What are your plans for going global?
FB: We’re also in the process of opening an office in London, but over time, we’d like to have a physical presence and an ability to transact in all of the core global markets. The next location would likely be Asia.
SMSJ: How revolutionary is VaultChain?
FB: I think it’s transformative. I think the gold market has skipped an entire generation of technology. It effectively functions today the same way it functioned 30 years ago and a lot of the cost and friction and other issues that are facing it haven’t been addressed. It has plodded along in the same way that it has, so I think we’ll be part of a revolution in the gold business. The market is going to change dramatically.
