The Digital Gold Ecosystem in the UAE

Table Of Contents

Introduction
Digital Gold: Physical Key to Digital Key
Blockchain-Based Digital Gold Tokens: Case Study
Benefits of Digital Gold
Shariah Compliance of Tokenised Gold
Structuring a Digital Gold Company in the UAE
Conclusion

Introduction

The history of gold has been intrinsically intertwined with human progress and civilisation for at least six and a half millennia.ⁱ Archaeologists uncovered the earliest processed gold treasures, comprising 3,000 artefacts, at an ancient Thracian burial site in Bulgaria. By 600 BC, gold was used as de facto currency through Lydian coinsⁱⁱ, marking the beginning of its role in formal economies.

So, what makes gold such a treasured asset?

Well, gold has historically been perceived as a symbol of wealth, power, and majesty. Worn by emperors and monarchs, its symbolic association with divinity and authority has been a part of numerous cultures. The importance of gold, however, goes beyond how it has socio-culturally been associated with power. The gold standardⁱⁱⁱ, for example, shows gold’s important role in monetary systems, providing a foundation for global trade and economic stability. It has also served as a hedge against inflation and a trusted refuge during times of financial uncertainty. Ultimately, the value of an object is determined, among other things, by how much someone is willing to pay for it, and gold has been perceived as universally desirable from time immemorial.

However, we now live in a fast-paced, digitally driven world where traditional physical assets are constantly being reimagined. And the incredible growth of technology has revolutionised the way we interact with these assets. Just like other digital assets such as cryptocurrencies, gold has also entered the realm of digital innovation. In this blog, we will look deeper into understanding digital gold, the technologies behind its different forms, and what businesses should do to enter the UAE’s burgeoning digital gold ecosystem.

Digital Gold: Physical Key to Digital Key

While there has been significant progress in the standardisation of gold over the years, concerns about its purity and authenticity remain significant barriers to investment. This sentiment is echoed by David Tait, CEO of the World Gold Council, who cited in one of his talks that 48% of consumers lack trust in gold^iv. Additionally, 28% worry about purchasing fake gold, and 21% express concerns about its purity. These doubts make traditional gold ownership challenging for many investors.

The challenges, however, extend beyond purity. Storing physical gold safely has always been a concern simply because of the risks associated with the sheer value of gold. A common method involves depositing gold in a bank’s secure vault, for which the investor is given a key. But this process often comes at a cost. Renting a vault incurs fees, transporting gold to and from the bank can also be cumbersome and risky.

Digital gold offers a revolutionary alternative to holding physical gold, replacing the physical key with a digital key. In this model, investors no longer need to worry about purity or the risk of buying counterfeit gold, as the gold is held securely in high-security vaults by trusted providers. Instead of a physical key, investors receive a digital certificate or token, which acts as their digital key to ownership. Digital gold is backed by physical gold so that the investment remains tangible, albeit in a more convenient format. The only caveat is ensuring that the chosen service provider is genuine and reliable.

It’s important to note that digital gold is not a concept exclusive to modern companies. For instance, the Royal Mint of Great Britain, an institution with over 1,100^v years of history, has introduced a digital gold programme. This allows investors to buy gold for as little as £25^vi, making gold ownership more widely accessible to users. Similarly, many medium to large-scale jewellery houses now offer digital gold services, catering to a diverse range of customers.

O Gold, a Dubai-based company, is particularly relevant as, in addition to selling gold bars, coins, and jewellery, O Gold also provides the option to purchase digital gold. After completing their rigorous KYC process—which includes face liveness check and document verification—customers can deposit money from their bank account to buy and sell gold and silver online. Furthermore, O Gold also “enables the issuance of stablecoins backed by physical gold.” ^vii

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Blockchain-Based Digital Gold Tokens: Case Study

The blockchain operates as a decentralised ledger, recording every transaction and ownership detail in a tamper-proof and immutable way. This ensures transparency by allowing all participants to view and verify the data without the risk of alteration or forgery. Backed by real gold stored securely in vaults, each token in the blockchain represents a specific amount of physical gold. Furthermore, the distributed nature of the blockchain reduces reliance on a single authority, increasing security and resilience against fraud or system failures. However, it is also important to ensure that the tokens are issued by reputable concerns with reliable third-party audit programmes to maintain trust and authenticity. Let’s look at the largest tokenised gold company by market capitalisation, Tether Gold, and their XAUt token to understand broadly how the system operates.

Each XAUt token represents 1 troy fine ounce, equivalent to 31.1034768 grams^viii of London Good Delivery gold, stored in a vault in Switzerland and can be fractionalised into increments as small as 0.000001 troy fine ounce as per Tether Gold’s whitepaper.^ix Holders of XAUt tokens have the option to redeem their tokens for physical gold, subject to fees and minimum requirements. Alternatively, holders can request Tether Gold to sell the gold and receive the proceeds instead of physical delivery.

When a user purchases XAUt tokens, the gold bar linked to the token is recorded in Tether Gold’s system. This connection can be verified through the “Look-up Website,” where token holders can identify the specific gold bar associated with their tokens. If tokens are transferred between on-chain addresses, the system instantly reallocates the physical gold to reflect the new ownership while minimising the number of bars associated with each address. Tether Gold’s tokens are available on exchange platforms including Bitfinex, HTX Global, and Bitget, among others.^x

Benefits of Digital Gold

	Physical Gold	Digital Gold (Non-Tokenised)	Digital Gold (Tokenised)
Cost	High premiums, storage, and insurance costs.	Lower costs	Lower costs
Ownership	Ownership of tangible gold.	Fractional ownership possible, allowing for smaller investments.	Fractional ownership possible, allowing for smaller investments.
Liquidity	Relatively illiquid; requires physical transfer and buyers.	Liquid; Tradable online, can often be traded 24/7 (platform dependant).	Highly liquid; can be traded 24/7 on blockchain-based exchanges
Flexibility	Limited; selling typically requires whole units of gold.	Partial liquidation	Partial liquidation at real-time market prices
Storage Security	Stored physically by the investor or in secure vaults (at a cost).	Stored by third-party providers, generally insured and audited.	Blockchain-backed; physical gold stored in secure, insured vaults.
Fraud Risk	Risk of counterfeit gold or theft.	Lower risk due to professional storage but still centralised platform dependant.	Blockchain eliminates fraud through tamper-proof and immutable transaction records.
Accessibility	Requires physical purchase, transport, and storage.	Accessible online.	Accessible via blockchain platforms

Shariah Compliance of Tokenised Gold

Shariah compliance refers to adherence to the Islamic principles, ensuring that all transactions and practises align with the ethical and legal guidelines of Shariah law, particularly regarding the permissible ownership, use, and trading of gold. The AAOIFI Shariah Standard on Gold, introduced in 2016, paved the way for a range of Shariah-compliant gold products, including investment accounts, physical gold ETFs, spot contracts, and regular savings plans, according to the World Gold Council.^xi

Five of the most important principles of Shariah compliant gold products include:

• Gold must be traded on a spot (hand-to-hand) basis.
• Ownership can be physical or constructive.
• Digital gold must be fully backed by allocated physical gold.
• Settlements must occur on the same day (T+0) or involve certificates confirming ownership of specific gold bars.
• Joint ownership is allowed, provided it reflects undivided beneficial interests in trusts.

The UAE based ComTech’s Gold Token (CGO), available on exchanges such as BitMart, Bittrue and LBank, has become the first company in the MENA region to receive Shariah compliance certification for a 100% gold-backed tokenisation product.^xiii

Structuring a Digital Gold Company in the UAE

If a company wants to start a digital gold business in the UAE, whether or not using blockchain-based technology, it needs to navigate both technological and regulatory landscapes carefully. On the technological front, building a robust infrastructure is essential. A company might need to undertake several important steps, including:

Developing Secure Platforms for Transactions:
• Digital Wallets: Secured and encrypted digital wallets that can hold digital gold tokens or certificates.
• Payment Gateways: Reliable payment gateways
• Real-Time Settlement Systems: Instant processing of transactions to minimise delays and build user trust.
Setting Up Secure Databases: For non-blockchain systems, secured centralised databases that comply with the UAE’s data protection laws, including the country’s Personal Data Protection Law, should be built.^xiv
Integrating Audit and Compliance Tools: Tools that provide real-time audit trails and simplify compliance reporting, helping to meet regulatory requirements efficiently, should be included in the digital gold platform.
Enhancing Cybersecurity Measures: Advanced cybersecurity protocols, including firewalls, intrusion detection systems (IDS), and regular penetration testing to protect against cyber threats, need to be implemented.
Incorporating AI Technologies: Artificial intelligence for fraud detection, transaction monitoring, and predictive analytics can be incorporated to enhance operational efficiency.
AML and CFT Compliance Mechanisms: Rigorous anti-money laundering and combatting the financing of terrorism (AML/CFT) processes and procedures are needed to be followed by a company offering digital gold if the company falls under the definition of Designated Non-Financial Businesses and Professions (DNFBPs) in the UAE. Integrated systems for fast KYC, robust Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) programmes for both individuals and corporations, as well as sanctions and PEP screenings, are essential components for ensuring compliance with the UAE’s AML/CFT laws.

Sometimes, even a non-blockchain-based digital gold platform might offer a peer-to-peer option of allowing users to send digital gold directly as a gift. Implementing this feature requires additional security measures and compliance checks to ensure it’s safe and meets regulatory standards.

For a blockchain-based digital gold token, a set of complex technological requirements is essential to develop. Companies must build secure and transparent methods for issuing tokens that accurately represent physical gold assets. This process also involves integrating gold tokens into trading platforms. Navigating the United Arab Emirates’ regulatory framework is also important while structuring the company. For companies that want to set up a business in the DMCC (Dubai Multi Commodities Centre), one of the world’s largest gold trading hubs, a detailed blog on the process can be found here.

Tokenized gold is a relatively new technology, and companies may find structuring their tokenized gold company challenging. According to a paper published by the U.S. Federal Reserve, tokenization refers to creating digital representations—or crypto tokens—for non-crypto assets such as physical gold and therefore, “create interconnections between the digital asset ecosystem and the traditional financial ecosystem.”^xv The integration of these two systems, therefore, requires meticulous attention to both technological necessities as well as a deep understanding of evolving regulatory compliance needs. For blockchain-based digital gold companies entering this space, it is also essential to ensure that their digital gold tokens are listed on regulated exchanges for trading.

Conclusion

Establishing a digital gold company in the UAE can be an exciting prospect with immense growth potential. In 2023, the United Arab Emirates surpassed the United Kingdom to become the world’s second-largest gold trade hub, handling over $129 billion in total trade—a significant 36% increase from the previous year.^xvi

The country has also embraced digital gold, offering new opportunities and challenges for companies interested in this innovative field. In the space of digital gold, the DMCC Tradeflow, an online platform for registering the possession and ownership of commodities stored in the UAE-based facilities, has positively contributed to the reliability of gold tokens with Tradeflow warrants. In 2022, the DMCC announced a partnership with a company in the field of tokenised gold, where each physical gold bar that was tokenised into digital assets was backed by a Tradeflow warrant^xvii considerably enhancing investment protection. In 2023, Tradeflow handled 144 kg of gold with a record value of AED 1.91 trillion of Islamic Finance Transactions registered.^xviii

The UAE’s evolution as a global gold hub is complemented by its forward-looking approach to digital innovation. With a robust infrastructure and a business-friendly environment, the country provides a fertile ground for businesses looking to establish themselves in the digital gold ecosystem. However, entering this space requires a careful balance between leveraging cutting-edge technology and adhering to the compliance measures required by the UAE. Companies must ensure their operations are secure, transparent, and aligned with regulatory standards to flourish in this competitive market.

Connect with AKW Consultants to structure your digital gold company in the UAE. We not only help you remain compliant with all regulatory requirements for structuring your business, but also provide all the technological support you need to get your digital gold business running.

References:

[i] https://www.bbc.com/reel/video/p0jphx6z/varna-necropolis-world-s-oldest-gold-treasure

[ii] https://www.hardmoneyhistory.com/history-of-gold/#:~:text=The%20first%20record%20of%20standardised,what%20is%20modern%20day%20Turkey.&text=King%20Alyattes%20minted%20coins%20out,the%20world’s%20first%20gold%20coinage.

[iii] https://www.investopedia.com/ask/answers/09/gold-standard.asp

[iv] https://www.youtube.com/watch?v=VliXuU_yAws

[v] https://artsandculture.google.com/story/PQVBbzbF04B9JA

[vi] https://www.royalmint.com/digital-investments/digigold/

[vii] https://www.ogold.app/business

[viii]https://www.investopedia.com/terms/t/troyounce.asp#:~:text=The%20troy%20ounce%20is%20a,pound%20(14.6%20troy%20ounces).

[ix] https://gold.tether.to/Tether%20Gold%20Whitepaper.pdf

[x] https://coinranking.com/coins/drc-20

[xi] https://www.gold.org/gold-standards/shariah-gold