Bank of England Considers Exempting Tokenized Gold from Certain Fund Regulation

The United Kingdom is taking a significant step toward modernizing its approach to digital assets linked to physical commodities. 

The Financial Conduct Authority (FCA), in close collaboration with HM Treasury and the Bank of England, is examining whether tokenized gold, and potentially tokenized commodities more broadly, should receive a dedicated regulatory treatment. 

One of the central options under discussion is a targeted exemption from the rules that govern collective investment schemes (CIS) and alternative investment funds (AIFs). 

This development sits at the heart of ongoing work on tokenized gold regulation in UK markets and has direct implications for tokenized gold regulation in England, given London’s central role in the global bullion trade.

Key Takeaways

• The FCA, working with the Treasury and Bank of England, is reviewing whether tokenized gold needs a targeted exemption from collective investment scheme and alternative investment fund rules.
• Tokenization could unlock London’s vast physical gold reserves for use as efficient wholesale collateral while preserving the UK’s dominant position in global bullion trading.
• A consultation is open until 23 October, with further papers expected on broader wholesale market tokenization and collateral eligibility.

Tokenized gold represents ownership rights over physical bullion held by an issuer or custodian. The digital tokens can be transferred peer-to-peer or via exchanges while the underlying gold bars remain securely stored. 

Unlike traditional paper claims or allocated accounts, these blockchain-based instruments offer the potential for fractional ownership, near-instant settlement, and easier integration into digital financial infrastructure.

Industry participants have told the FCA that uncertainty over whether such products fall inside the CIS or AIF perimeter is already restricting investor access and slowing product development.

Why Tokenized Gold Matters to UK Markets

London remains the world’s dominant over-the-counter gold market, accounting for around 70% of global notional trading volumes according to the World Gold Council. 

Vast quantities of physical gold are stored in the city’s vaults, supporting everything from central bank reserves to institutional trading and refining activity.

Yet the operational realities of moving physical bars, custody arrangements, insurance, transportation, and settlement timelines, create friction when gold is needed as collateral in modern financial markets.

Tokenization addresses several of these frictions. Digital tokens can be divided into smaller units, transferred across distributed ledgers, and potentially pledged as collateral without the same physical handling requirements. 

The FCA has highlighted that, unlike shares or debt securities which already benefit from mature electronic market infrastructures, gold remains a largely physical asset. Tokenization could therefore make a traditionally complex asset class more efficient and competitive.

Key benefits identified by regulators and market participants include:

• Greater divisibility of gold holdings for smaller or more frequent transactions
• Faster transfer and settlement compared with physical bar movements
• Improved transparency through on-chain ownership records and redemption rights
• Potential for wider use of gold as high-quality collateral in derivatives and lending markets
• Support for new retail and wholesale product innovation while maintaining clear links to physical bullion

Existing global products such as Tether Gold (XAUT) and Pax Gold (PAXG) already demonstrate demand. In July these two tokens alone had a combined market capitalization of roughly $4.4 billion. 

They operate under different regulatory treatments depending on the jurisdiction. Under the European Union’s Markets in Crypto-Assets (MiCA) regime, gold-backed tokens generally fall into the asset-referenced token category, although approvals have been limited. 

The UK is now assessing whether its own framework needs adjustment to avoid placing domestic products at a disadvantage.

The Regulatory Question: CIS, AIF, and Possible Exemptions

At the core of the current review is classification. If a tokenized gold product is treated as a collective investment scheme or alternative investment fund, or if its status remains unclear, certain investors may be restricted from holding it. 

This uncertainty has been flagged repeatedly by industry participants as a barrier to growth.

The FCA has indicated it will work with the Treasury to evaluate and potentially introduce a targeted exemption from the CIS and AIF regulatory perimeter for certain tokenized gold products or related market infrastructure. 

Officials have stressed that no final decision has been made and that the regulator remains open to a range of approaches. Options under consideration include:

• Clarifying how existing rules apply to transparent, fully backed tokenized gold
• Developing a recognized classification for specific regulatory purposes
• Assessing targeted rule or legislative changes
• Creating a bespoke regime for tokenized gold or tokenized commodities more broadly

Jon Relleen, FCA director of infrastructure and exchanges, has noted that tokenized gold emerged as an area of interest during the regulator’s discussions with industry.

“We’re keen to understand whether existing regulatory frameworks remain the right fit for gold markets and how innovation could strengthen the efficiency and competitiveness of UK markets,” he said.

This work builds on earlier conversations between the FCA and major banks regarding standards for tokenized gold, including its potential use as collateral. 

The consultation published in mid-September seeks feedback specifically on products that represent ownership of physical gold, feature transparent backing, clearly defined ownership rights, and reliable redemption arrangements. Responses are due by 23 October.

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Tokenized Gold as Collateral and Broader Wholesale Tokenization

UK regulators are looking beyond simple trading access. The FCA and Prudential Regulation Authority had previously identified tokenized gold as a possible collateral asset for uncleared over-the-counter derivatives. 

Gold-backed tokens are already seeing use in decentralized finance: by late August, Aave’s $25 million debt ceiling for borrowing against Tether Gold had been fully utilized, while other platforms had begun accepting PAXG and XAUT at loan-to-value ratios of up to 75%.

In the traditional finance space, the opportunity is even larger. The Bank of England and FCA have received industry feedback indicating that post-trade processes, clearing and settlement, represent one of the biggest opportunities for tokenization to free up capital and collateral. 

Research cited by the authorities found that U.S. market participants held an average of 7% more collateral than required as a safety buffer. Digital infrastructure could reduce some of the operational constraints that contribute to this excess.

The Bank of England is actively considering whether tokenized assets, including stablecoins, could qualify as collateral under its Sterling Monetary Framework.

It also plans to consult later this year on allowing central counterparty clearing houses to accept tokenized assets. These steps form part of a wider UK program on tokenizing wholesale financial markets that includes securities, collateral, and settlement infrastructure.

The following table summarizes key elements of the current UK tokenization agenda relevant to gold and related assets:

London’s Competitive Position and International Context

China has been actively building its own bullion trading infrastructure, creating competitive pressure on London’s long-standing dominance. 

By clarifying tokenized gold regulation in England and the wider UK, authorities hope to reinforce the city’s attractiveness as a center for both physical custody and digital innovation. 

The ability to move ownership of vaulted gold electronically without the full operational burden of physical transfers could prove a decisive advantage.

The UK’s approach also sits within a broader international conversation. Joint UK-US efforts announced earlier in the year aim to facilitate the movement of tokenized financial products between the two markets. 

Meanwhile, the Bank of England continues testing how tokenized bank deposits, regulated stablecoins, and a potential digital pound could interact while preserving settlement finality in central bank money.

For tokenized gold specifically, the immediate regulatory question remains whether digital representations of bullion should be treated under the same fund rules that apply to traditional investment structures. 

The FCA’s call for input and the parallel Bank of England–FCA feedback statement on wholesale tokenization mark the start of a more formal process. Any targeted exemption would require further coordination with the Treasury before changes to the regulatory perimeter could be introduced.

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Conclusion: What Happens Next

The consultation on tokenized gold remains open until 23 October. Later this year the FCA and Bank of England are expected to publish a tokenization roadmap setting out workstreams and target dates. 

The Bank of England will also consult on the eligibility of tokenized assets for central counterparties.

In parallel, work continues on the first digital gilt instrument, scheduled for issuance by the end of the first quarter of 2027 inside the Digital Securities Sandbox.

These initiatives collectively signal a pragmatic, market-driven approach: rather than forcing tokenized gold into existing fund categories that may not fit, UK authorities are prepared to consider tailored solutions that support innovation while protecting market integrity and investor confidence. 

The outcome will shape not only the future of tokenized gold regulation in UK markets but also London’s ability to remain the pre-eminent global hub for bullion trading and custody in an increasingly digital financial system.

Stay informed about the latest developments in tokenized assets, regulatory changes, and crypto market trends by reading in-depth articles on the Bitrue blog. Follow Bitrue for timely insights that help you navigate the evolving digital asset landscape.

FAQ

1. What is tokenized gold?

Tokenized gold is a digital token that represents ownership rights over physical gold bars held by an issuer or custodian. The tokens can be transferred on a blockchain while the underlying metal remains in secure storage.

2. Why is the FCA considering an exemption for tokenized gold?

Industry feedback has highlighted that uncertainty over whether these products fall under collective investment scheme or alternative investment fund rules could limit investor access. A targeted exemption or bespoke regime is one option being evaluated with the Treasury and Bank of England.

3. How does this relate to the Bank of England’s work?

The Bank of England is examining the use of tokenized assets, including potentially tokenized gold and stablecoins, as collateral under its Sterling Monetary Framework and is planning a consultation on acceptance by central counterparties.

4. What is the timeline for any changes?

The current FCA call for input closes on 23 October. A broader tokenization roadmap is expected later this year, with any formal exemption requiring further work with the Treasury.

5. Does this affect existing products like Tether Gold or Pax Gold?

The review focuses on the UK regulatory perimeter and wholesale market infrastructure. Existing international products already operate under different jurisdictional rules; clearer UK guidance could influence future domestic offerings and market infrastructure.

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