The gold industry has vulnerabilities that leave it open for disruption, corruption, and mismanagement from mining all the way through trade in the gold futures market. When it comes to supply chain, it’s not a matter of if but, rather, when bad actors will target critical infrastructure systems. Valuable, highly-regulated goods such as gold are targeted all the more. It’s only a matter of time before the gold industry faces a high profile disruption from ransomware attacks.
Blockchain supply chain solutions for tracking gold provide much needed remedies for vulnerabilities related to fraud, asset tracking, and the prevention of ransomware attacks. In order to understand the areas where blockchain can help companies involved in the gold industry, it’s helpful to break the supply chain down into its elements and highlight vulnerabilities therein. But first…
What makes the gold industry vulnerable?
The short answer to this question is, everything about it. The fact that the seven trillion dollar gold market is cash intensive makes it incredibly high risk. Gold and cash currencies can be anonymized relatively easily too. Furthermore, gold offers reliable returns, which attracts bad actors to it as a medium of exchange. Finally, gold is and always has been highly fungible, facilitating easy trading but just as easy smuggling.
- Cash Intensivity: A big chunk of the gold market is fueled by small, cash-for-gold businesses that require little startup capital to generate a continuous stream of untraceable gold commodities purchased below market prices from both criminals and the general public. These transactions are low value but high volume.
- Anonymous Trade: Many transactions related to gold trade occur anonymously offering law enforcement agencies little opportunity to source gold or identify the persons involved in the transaction.
- Global Currency and Medium of Exchange: Gold has inherent value. Even retail gold can sometimes substitute for cash in exchanges.
- Reliable Returns: Gold has long offered the world a valuable asset for exchange and is therefore trusted far more, on average, than more complex financial tools. This contributes, in part, to the lack of volatility in the gold market and subsequent bias by bad actors to use gold for exchanges.
- Easily Traded (and Smuggled): Gold can be melted down and disguised as almost any common or worthless metal object, making it easy to move it out of an official supply chain and across borders illegally. Virtual gold offers just as many, if not more, opportunities for corruption and exploitation. For example, the gold sector includes requirements for depository certificates, which themselves can be falsified or traded illicitly with ease. This particular aspect of gold trade can be improved and secured by the addition of blockchain technology — more on this shortly.
Where are the vulnerabilities in the gold supply chain?
Many of the vulnerabilities within the gold industry lie within the gold supply chain. The journey of gold, from production to consumer and investor, consists of several stages — the beginning of which is either mining or recycling. Each stage of the gold supply chain offers an opportunity for bad actors to either disrupt or integrate.
- Mining: Gold mining happens at large, medium, and small scales all over the world. Large and medium scale mining encompasses extraction using industrial and mechanized methods all of which are susceptible to corruption, theft, and fraud. Informal or semi-formal, small scale mining accounts for 12% of the global mine supply. Illegally mined gold from these types of operations gets sold on the black market or smuggled into other jurisdictions to enter the supply chain for refining.
- Recycling: About a third of the new gold introduced to the market each year comes from gold recycling. The supply of recycled gold comes, in part, from cash-for-gold businesses that are susceptible to the risks outlined above.
- Refining: Mined and recycled gold enters the refining process referred to as smelting. As previously mentioned, illegally mined gold can get smelted along with legally sourced gold. Additionally, organized crime can misrepresent or fraudulently obtain records associated with transactions.
- Retailing: The sale of gold for retail represents a significant market internationally and introduces a large opportunity for fraud and exploitation from the misrepresentation of the origin of gold, to identity fraud, to complex scams involving purchase history and receipts. Additionally, organized crime can exploit arbitrage opportunities by sourcing illegal payments in one jurisdiction that get misunderstood or misperceived in another as legitimate.
- Investing: Gold is a popular and valuable financial instrument and therefore subject to the same vulnerabilities of any traded asset. Because traders and recipients of gold can transact without the physical exchange of gold (in the futures market), there is ample opportunity for fraud, identity theft, and other risks.
How can blockchain help the gold industry?
Blockchain supply chain solutions can help in a variety of ways across the gold industry including to ransomware-proof the supply chain, a method of attack that wreaks havoc on valuable markets globally. Generally speaking, blockchain technology makes records fraudulent-proof. You can use blockchain to track the origin and uniqueness of an asset, its movement, and its chain of custody – without fail. Blockchain creates unique digital identifiers that can’t be backdated or edited. This indisputable data provides transparency and trust for multi-party visibility of events across the supply chain of gold. Specifically, you can use blockchain to:
- Assign digital identities;
- Track packaging, shipment, and receipt;
- Integrate unique verifiers into enterprise IT security solutions;
- Defeat ransomware attacks;
- And implement non-fungible tokens
Let’s explore each of these five benefits of blockchain technology as it relates to improving the traceability of gold trade and ownership.
- Mining & Recycling: Blockchain won’t protect against small players and criminals melting down gold and trading it outside official supply chains. However, it will make it harder for that gold to make it back into legal supply chains. When gold enters the supply chain, we have an opportunity to conduct stringent physical audits so that mined gold and shipment thereof match digital records exactly. At this point, a digital identity can be assigned to gold. When the digital ID is designed to incorporate blockchain technology, each point of transfer will confer an immutable record on the ledger associated with the gold’s transit.
- Refining: Using blockchain technology to track gold from its source confers the benefit of immutable ledger. If assets enter the gold supply chain for refining from a source that isn’t tracked in the immutable ledger, it would be flagged for additional scrutiny. Assets developed during the smelting phase can get their own digital identities that allow them to be tracked during packaging, shipment, and receipt.
- Retailing: Businesses can use blockchain technology to integrate with enterprise security and cloud infrastructure for improved tracking and transparency around transactions. This may be particularly appealing to larger retailers subject to compliance and security requirements as they will generate better audit trails protected from the corruption of purchase history and record tampering.
- Investing: There’s an enormous opportunity for blockchain to improve the investing side of the gold business. Specifically, blockchain technology enables investors to track gold from mine to vault as well as protect their purchases from ransomware. Read more about this here.
Additionally, there are exciting new opportunities for NFTs and gold-backed tokens to transform the gold market more foundationally. Essentially, gold-backed cryptocurrency is a digital derivative asset whose value is underwritten by the equivalent price in gold. For this to work, the equivalent gold must be present in the reserves/vaults of a trusted custodian as physical collateralized assets. HeraSoft’s proprietary and customized software enables companies like GoldFlorin to launch gold-backed asset tokens and offer professional customers secure access to viewing data on their commercial gold holdings.
Blockchain-powered gold tracking is one of the most transformative blockchain technology use cases for enterprises. Using blockchain technology to trace gold provides transparency and improves trust with multi-party visibility of the asset from origination at mining sites, through transportation and manufacturing, to the delivery of finished products to retailers or vaults. Tokenization is even changing how people can own and invest in gold.
Learn more about how we can help
HeraSoft’s next generation software offers a variety of products and services to improve enterprise logistics management and cybersecurity.
- HeraVault™ offers distributed cloud storage with built-in replication, error correction and restoration capabilities.
- HeraFlow™, is an AI-Powered threat analysis system for fast and accurate threat data monitoring perfect for high-volume workloads and enterprise-level SOC’s.
- HeraPass™, with inherently fraud proof design, helps businesses innovate user management in IoT environments by achieving the anonymization and encryption of highly-sensitive data.
- HeraStamp™ proof-stamps mission critical data to permanent data stores and can help with data integrity in, for example, ecommerce settings.