Gold-backed Tokens
Nearly $1 billion in TVL that lacks sufficient controls and transparency
Gold-backed tokens are a small market compared to cryptocurrencies and digital assets in total but still have a substantial market cap of nearly $1 billion for the top three. All of the top three tokens claim to be fully redeemable for physical gold. To date, gold-backed tokens have attracted little to no attention or scrutiny from journalists and researchers. None of these tokens provide complete audits or full transparency of any kind over all the gold bars allegedly backing their tokens. This is quite remarkable because unlike other types of financial assets, gold bars are trivially easy to count, weigh and test. Audits for gold bars are inexpensive and quick. In the case of both PAX Gold and Tether Gold, they claim to be backed only by LBMA 400 troy ounce good delivery bars which means despite their market caps of nearly $500 million each, they would each have significantly less than 1,000 bars to audit. This would be a trivial task easily performed and there is little excuse not to do it.
PAX Gold (ERC-20 $PAXG): $485 million USD with a claimed 271,181.759 troy ounces of backing.
Tether Gold (ERC-20 $XAUT): $441 million USD with a claimed 246,524.330 troy ounces of backing.
Kinesis Gold (Centralized Fork of Stellar $KAU): $64 million USD with a claimed 35,587.785 troy ounces (1,106,903.849 grams) of backing as of June 2022. Kinesis also issues a silver token ($KAG) of substantial size that operates in the same way as $KAU. All the problems outlined with $KAU below also apply to $KAG.
Tens if not hundreds of other smaller token projects, some of which are still active and some of which have already failed, likely fall into at least four different categories:
1) Gold in name only with no claimed relationship to gold
2) Gold backing claimed but a complete frauds (example: claims gold backing but has no gold backing)
3) Gold backing claimed but a partial fraud (example: claims full backing but has partial gold backing)
4) Gold backing claimed and is legitimately fully backed
Token Audits
PAX Gold ($PAXG): Auditing the token supply, transactions and holders is easy and straight forward because $PAXG is a standard ERC-20 token. This can be accomplished with any Ethereum block explorer.
Tether Gold ($XAUT): Auditing the token supply, transactions and holders is easy and straight forward because $PAXG is a standard ERC-20 token. This can be accomplished with any Ethereum block explorer.
Kinesis Gold ($KAU): Because Kinesis using a centralized fork of the Stellar blockchain and only provides a block explorer with an extremely limited feature set, it is difficult or perhaps impossible to perform a full audit of $KAU’s supply, transactions and holders. Since the number of tokens in circulation cannot be determined, whether or not the tokens are fully backed cannot be determined even if a complete physical gold audit were to be provided. Kinesis does provide a dashboard within their centralized exchange (CEX) with claims regarding the token supply but this does not provide the same type of cryptographic proof that a public blockchain and block explorer provide as is the case with $PAXG and $XAUT.
Physical Gold Audits
PAX Gold ($PAXG): PAX Gold provides monthly attestations but they are often published weeks or even months after the attestation date. Attestations are not audits and only attest to a specific quantity of metal in a specific location(s) as of a specific date and time. The attestations do not provide a full bar list and lack other critical details such as fineness of the bars which can vary among LBMA good delivery bars according to the official LBMA standard. In fact, the latest attestation specifically states:
“This does not contemplate the quality of the gold on hand or its value in U.S. Dollars or other currency denomination.”
As of December 12, 2022, the latest available attestation is dated October 31, 2022. For the quantity of gold PAX Gold claims to hold, the variance in fineness allowed within the LBMA standard which only stipulates >=0.995 is more than $2 million USD (that is the difference in value between 271,181.759 troy ounces of 0.995 vs 0.9999 gold).
Tether Gold ($XUAT): Tether Gold provides only quarterly reports, the latest of which is dated September 30, 2022. The gold holdings are only a footnote within the report which mostly cover Tether’s other stablecoins, however Tether’s quarterly report at least makes references to how many fine ounces they hold as well as to the dollar value of the gold:
“At the reporting date, there are 246,524.33 XAU₮ tokens that have been issued, 161,664.49 of which have been sold and 84,859.84 of which are ready for sale. The custodian holds 246,524.33 fine troy ounces of gold in respect of the XAU₮ tokens. The fair market value of the gold held by the custodian in respect of the XAU₮ tokens that have been sold is equal to US$268,461,668. The fair market value of the gold held by the custodian for XAU₮ tokens ready for sale is equal to US$140,919,098.”
Like PAX Gold, Tether also does not provide a complete list of bars.
Kinesis Gold ($KAG): Kinesis claims to perform bi-annual audits of their gold (and silver) holdings but have only actually performed three audits during the period March 20, 2020 through December 12, 2022. The most recent audit is dated June 20, 2022 but was not released publicly until more than six weeks later. Despite Kinesis’ claims to the contrary, the June 20, 2022 is not a complete audit. The existence of 13,256 troy ounces (almost $24 million USD at the current spot price) is confirmed only by a letter from “hititVal Cargo Transport Co.Ltd.” This gold also represents over 35% of the total claimed holdings. Actual weight for the five LBMA 400 troy ounce good delivery bars is conspicuously missing even though 400 troy ounce good delivery bars actually range in weight from 350 to 430 troy ounces. The implied weight of the five bars together is 62.3224 kg or 2,003 troy ounces which is within the expected range although it’s anyone’s guess how likely it would be to end up with five bars that average to almost exactly 400 troy ounces each when the LBMA good delivery bar standard allows for such a wide range in weight.
Archives of the Kinesis website at the time of the audit show that Kinesis claimed to be storing 100% of their holdings in locations other than Istanbul. Specifically:
”Secure and fully insured vault storage
All bullion is securely held within fully insured vaults.
All precious metal held by Kinesis is fully allocated. Kinesis gold (KAU) and silver (KAG) are based 1:1 on physical gold and silver bullion, stored within fully insured, secure vaulting facilities in Sydney, Brisbane, Singapore, Hong Kong, London, Zurich, New York, Dubai, and Liechtenstein.
Through ABX, Kinesis is able to access robust global vaulting infrastructure, ensuring all precious metals are safeguarded to the highest standards.”
Istanbul is not on this list yet Kinesis claims more than one third of their total gold holdings were held by “hititVal Cargo Transport Co. Ltd.”
Redemption
PAX Gold ($PAXG): PAX Gold claims that their tokens are redeemable but only through a procedure that is so impractical that one could argue that the system is designed to discourage redeeming tokens for physical gold. Directly from the PAX Gold user guide:
“Redeem for Physical: You may redeem for a Physical gold bar by initiating a sell request through the Paxos wallet dashboard on the PAX Gold page. For redemption of PAXG into Gold Bars, you will need to have a minimum of 430 PAXG plus fees given that London Good Delivery gold bars range from 370–430oz. Please note that Paxos can have the gold bar securely delivered only to vaults in the UK. Paxos maintains strict rules for the redemption of physical gold. Only individuals registered with Paxos as account holders can redeem gold. Other individuals may not redeem gold on behalf of the account holder.”
The terms state that a user must hold 430 $PAXG tokens equivalent to 430 troy ounces to even make a redemption request. Then PAX Gold will select a bar at their discretion that could weigh between 370–430 while the user would be left tokens worth as much as $100,000 USD that they could not redeem unless they acquire more $PAXG tokens worth hundreds of thousands of dollars to start the process all over again. Why they do not let users select the bar they want and then acquire the exact number of tokens required and then redeem is unclear. The most obvious reasons seem to be that either they want to discourage redemption so as to make it as difficult as possible or the system is not well designed and they have not made any efforts to improve it over the past three years. It is unclear whether PAX Gold made a mistake when they wrote their terms or are intentionally indicating they only hold bars weighing between 370–430 troy ounces. The actual LBMA standard is 350–430 troy ounces.
Tether Gold ($XAUT): Tether Gold’s redemption terms are similar to PAX Gold’s with the additional stipulation that you can only take physical delivery in Switzerland:
“4.3. Gold Token holders can receive a “London Good Delivery” gold bar for each 430 Gold Tokens redeemed, subject to adjustment for actual size and purity of the bullion bar to be delivered. Gold bars do not generally contain exactly 400 fine troy ounces of gold but generally contain fewer than 430 fine troy ounces. If the gold bar to be delivered in connection with a redemption contains fewer than 430 fine troy ounces, the token holder seeking to redeem their Gold Tokens for physical delivery of the bullion bar will redeem only the number of Gold Tokens that corresponds to the number of fine troy ounces of gold on the applicable bullion bar and the remaining Gold Tokens will be returned to the Tether Gold Wallet. In the unlikely event the gold bar to be delivered in connection with a redemption contains more than 430 fine troy ounces, the token holder seeking to redeem their Gold Tokens for the gold bar will be required to either (a) provide the applicable additional Gold Tokens so that the number of Gold Tokens being redeemed corresponds to the number of fine troy ounces of gold on the applicable bullion bar, or (b) pay an additional amount of Fiat necessary to cover the cost of the excess gold (based on current market prices for gold in the Swiss gold market).
4.4. A Gold Token holder who has effectuated redemption can elect to receive physical delivery of their gold bar at a place of their choosing, acting reasonably, in Switzerland (subject to the payment of fees in accordance with the Gold Token Fee Schedule in effect at the time of redemption). Rather than take physical delivery of their bullion bar, a token holder can request that Tether Gold facilitate the sale of their bullion bar in the Swiss gold market. If the token holder makes this election, Tether Gold or its representative will attempt to sell the token holder’s gold bar to a regulated Swiss gold dealer or broker with whom it has a relationship. If the bullion bar is successfully sold via broker dealer, the holder will receive the proceeds from that sale, less applicable fees set out in the Gold Token Fee Schedule in effect at the time of redemption, via a wire transfer of Fiat. Any sale transaction is subject to the rates and transaction counterparties available at the time of election. Tether Gold and its Affiliates have no obligation to repurchase any Gold Tokens or any bullion bars.”
Kinesis Gold ($KAU): Kinesis claims their tokens are fully redeemable for a variety of products in a variety of locations.
Business Model Sustainability
Because $PAXG and $XAUT tokens that are held for long periods of time without any transactions do not appear to generate any revenue for PAX Gold or Tether Gold, it is unclear how the costs of storage, insurance and attestations would be paid for if a significant number of tokens are hoarded long term.
Kinesis has relatively high fees that could plausibly cover all costs.
Red Flags
Redemptions: $PAXG has had material redemptions according to blockchain data and their attestation reports, however this only began in mid 2022. For some reason, their May 2022 attestation is missing (try to click on May and note that it doesn’t link to anything).
$XAUT does not appear to have ever had any redemptions, unlike $USDT which has had many billions of dollars worth of tokens removed from circulation. It seems strange that no $XAUT token holders chose to redeem for psychical bars during such a volatile year for crypto markets.
Kinesis makes claims about issuance and redemption of $KAU but these claims cannot be verified due to the fact that they do not perform financial audits or even regular audits of their gold, their latest audit is incomplete and they do not provide a fully functional block explorer for their Stellar fork.
Location: Kinesis is registered in the Cayman Islands (36A Dr. Roy’s Drive, Grand Cayman, KY1104 Cayman Islands).
Tether’s latest report lists several entities in the British Virgin Islands as well as one in Hong Kong.
Stellar Blockchain Fork, No Fully Functional Block Explorer: Since the Kinesis $KAU token supply, transactions and holders cannot be audited, it is not possible to determine if the tokens are fully backed even if Kinesis’ incomplete and infrequent audits are assumed to be accurate and correct.
Token Distribution and Adoption: $PAXG shows real use and adoption with a token supply spread across more than 20,000 unique addresses with more than half a million on-chain transactions.
$XAUT is held by only 664 unique addresses. Furthermore, 38% of the supply is controlled by a single address. The top two addresses control more than 72% of the total supply while the top ten addresses control more than 95% of the supply. $XAUT has less than 10,000 on-chain transactions. This seems unusual for a gold-backed token that purports to be 90% the size of its closest competitor ($PAXG) by market cap.
As mentioned above there is no block explorer with the required functionality to perform this type of analysis for $KAU.
Gold Allocation: $PAXG provides a function on their website to determine which specific gold bars back a given Ethereum address holding $PAXG tokens. However, two of the top ten $PAXG addresses show no gold backing.
Gold-backed tokens are now large enough to justify more research and more scrutiny. Gold-backed should be one of the easiest among all token projects to provide full transparency and audits for yet all three of these projects provide infrequent, outdated and extremely lacking information.
Custodians: $XAUT’s custodian is not immediately apparent but previous research suggests the custodian is “T G Commodities Limited.”
