Digital Assets are emerging as a key application of blockchain technology and are underpinning significant changes across the metals supply chain.
So what are Digital Assets and how will they impact on Metals mining, processing, supply chains, and trading?
Digital Assets are electronic stores of value, created with blockchain technology, that can be traded securely, cheaply, and efficiently via peer to peer networks. They can be connected to physical artefacts (a kilo of Copper, a proportion of a building), financial instruments (a future contract over zinc, a US Dollar, loyalty points, shares in a company), digital items (an image, a song, 100 Gb of data), access rights (entry to a theme park, access to a video game, entry to a conference) or anything else that has value or generates an income stream. Crypto-currencies like BitCoin, Ethereum, and USD Tether are the best known examples of Digital Assets, but increasingly the category is being expanded to include digital representations of real estate, shares, derivatives, metals, gems, and almost every other type of asset you can imagine.
One of the key applications of Digital Assets is to make previously illiquid assets highly liquid–think real-estate, fine art, ore reserves, business data, and almost any class of financial assets. What’s more, when assets are digitized, they can be traded globally, sometimes (psudo-) anonymously and without the need for trusted intermediaries/middle-men. Exchanges such as tZero, CezEx promise to make trading Digital Assets easy and fast.
This means global, transparent markets can be created for any of these assets that allow them to be traded easily and cheaply without reliance on traditional institutions and intermediaries.
Digital Assets generally feature so-called “smart contracts” that encode the rules of exchange into the assets themselves. This allows the assets to determine if they can be transferred, under what circumstances, when and for what cost without the need for human intervention.
Just as physical assets are stored in a vault and digital files can be stored at home on a hard drive or cloud-drive, Digital Assets are stored in a “wallet” which is a secure application that uses cryptographic methods to secure the assets. Wallets can be in software, even in the cloud, or in hardware, in which case the hardware wallet can be stored in a safe or other secure location. The analogy to having cash in a physical wallet or a 100g gold ingot in your safety deposit box is very close. If the passwords are lost, the software and files get erased or the hardware wallet is damaged beyond usability, the assets are gone. At least Digital Asset wallets can be backed up! Just as custodianship is a critical part of physical asset management, custodianship of Digital Assets is rapidly becoming big business.
By way of example, a physical ounce of silver can simply sit in a vault. If it is sold, it may need to be transported. Humans may need to: confirm the transaction; retrieve the metal, dispatch, provide logistics/transport, receive the metal, vault and allocate the metal, and make an entry into the register.
Insurance needs to be arranged. Audits must be conducted. Of course, the metal itself has no say in stopping itself being stolen, sold to a sanctioned party or melted.
In contrast, 1oz of digital silver can be traded on a digital exchange, the transfer of ownership and custody is immediate, nearly free and automatically recorded on an unchangeable blockchain database (referred to as “immutable storage”). It can also determine if a proposed transaction can occur and stop itself being transferred if the transaction is prohibited (eg the buyer has to be an accredited investor, the seller has escrowed the asset, etc). The owner can open an app on their smart-phone, post a sale, and be done. The buyer can do the same.
The digital asset may be backed by real metal that is vaulted somewhere but it doesn’t have to be. It could be backed by a derivative contract, an ETF, a reserve in the ground or some other agreed claim on metal.