The Request for Proposal (RfP) process has now concluded and is replaced with standard development which will encourage progress of multiple initiatives.
Technology developments are integral to support market development. Technology can help to meet the requirements of regulators, but more importantly, if implemented appropriately, can contribute towards making markets more efficient.
LBMA over the last year has been exploring how technology can address some of the risks facing the global precious metals market, namely supply chain provenance and trading bars with confidence. In addition, LBMA is following some of the development in relation to the tokenisation of gold, to understand what this could mean for the market.
In 2018, LBMA launched a request for proposal, focusing on two key areas, with emphasis on gold:
i. new technology for supply chain provenance
- Such technology will help mitigate the risk faced throughout the life cycle of the bar, and help to securely record bar specific data (i.e. brand, origin, custody, location) on a trusted platform.
ii. a technology based security feature or security process (collectively referred to as Security Feature) adopted for bars
- This will help ensure that any bar can be registered and subsequently be reliably and uniquely identified
About 30 firms took part in the process, with the majority proposing blockchain technology to help address supply chain provenance. A Working Group was established to support the LBMA’s review of the information received. This group was made up of representation from the upstream, logistics, downstream, as well as other industry groups. The Refiners were separately engaged outside of the Working Group to manage any potential conflicts of interest.
In summary, the Working Group concluded that a set of standards should be established to identify credible solutions that market participants could choose from.
Blockchain Technology Solutions
Since the launch of the RfP, it has become clear that there is a lot of development in the area of blockchain use for supply chain issues. It is accepted that the technology can provide clear track and trace capabilities. However, it is too early for LBMA to recognise a few select blockchain solutions, since there are more questions than answers at this stage, for example questions around interoperability, data standards and costs. LBMA notes that whilst the initial implementation of blockchain solutions may represent upfront costs, the long term cost savings from a regulatory, compliance and security standpoint could potentially represent significant cost savings for all participants.
The intention, at this point in time, is to observe as this technology development continues, and for LBMA to engage when it can determine, for example, how much of the market will embrace this technology. In particular, the role of LBMA will be to identify which solution(s) end up attracting a critical mass. This approach will also allow the various initiatives to continue to develop. LBMA will also continue to engage with other industries to understand how they are applying blockchain technology.
As this technology develops, LBMA’s role will be to eventually support the implementation through developing protocols, which would include:
- List of principles;
- Common adoption of definitions and concepts in the application of blockchain enabled solutions;
- Provide unique entity identifiers to eventually support interoperability;
- Information required from the blockchain (data management);
- Security features compatibility;
- Competition law/anti-trust; and
- Interoperability between different technologies selected by different supply chain parties.
There is a lot of interest by service providers on tokenising gold by using blockchain technology. LBMA is keeping in contact with the more credible projects, given their reliance on LBMA’s Good Delivery List. A lot of these projects focus on how the technology can help trace the underlying physical gold backing each token to a specific vault. Some of the outcomes of these projects could potentially be of interest to market participants. More will be shared on this as the projects develop.
Whilst service providers develop their blockchain solutions, LBMA will initially focus on the security feature (SF) and the standards required to recognise a credible solution.
It has been agreed to launch two work-streams, whereby LBMA will develop:
- Specific standards that will help to recognise SF(s) that will become the minimum requirement for large London Good Delivery bars.
- General standards to recognise SF(s) for kilobars.
This will allow market participants to select the SF they would prefer to use based on the ‘recognised’ list provided by LBMA.
The RfP process has been concluded, with the view that LBMA will remain engaged with all service providers to follow developments on how blockchain solutions can address supply chain provenance. Eventually LBMA will develop the standards, as listed above under blockchain.
In the meantime, LBMA will lead the process with developing the criteria for a credible Security Feature. This will be launched for consultation in Q3 2019, with a view to recognising suitable Security Features from 2020.