Tokenized Commodities: How They Work

What Tokenized Commodities Are and How They Work

Tokenized commodities are on‑chain tokens that represent rights in an underlying physical good such as gold, silver, or other raw materials. The core idea is simple: a regulated or supervised entity holds the commodity in custody, and issues a token that maps one‑to‑one to the reserved asset. Unlike synthetic exposure or derivatives, well‑structured tokenized commodities convey an ownership claim or beneficial interest in the specific inventory held by the custodian, often documented in terms akin to warehouse receipts. In the United States, commodities are defined broadly under the Commodity Exchange Act, which covers goods, articles, and interests where futures are or could be traded. This legal context matters for platforms that offer leveraged or margined “spot” to retail customers.

Tokenization steps

• Custody and inventory. A custodian or trust company holds commodity inventory in approved vaults or facilities. For gold, this commonly means LBMA Good Delivery bars in specified jurisdictions.
• Minting and allocation. The issuer mints tokens against reserved inventory and, for some gold tokens, publishes an allocation lookup that maps wallet addresses to bar serial numbers.
• Transfers and secondary trading. Tokens move peer to peer on public chains with finality governed by block confirmations. Transfers can settle near‑instantly, 24 hours a day.
• Redemption and burn. Verified holders can redeem tokens for the underlying commodity or for cash proceeds. Redemptions burn the corresponding tokens, shrinking circulating supply.

Market context

Tokenized commodities are a small but growing corner of real‑world assets. Independent dashboards regularly show issuance concentrated in gold tokens and a market structure dominated by a handful of issuers. Using live dashboards, observers typically see a low single‑digit billions market capitalization, with gold‑backed tokens accounting for the majority and leading issuers holding the lion’s share of outstanding supply. Annual research snapshots corroborate the concentration of issuance in gold.

Spot vs financed transactions

If a platform offers retail users commodity exposure with leverage, margin, or financing, the transaction may fall under the CEA’s “retail commodity transaction” regime and be treated as if it were a futures contract unless “actual delivery” occurs within 28 days. CFTC interpretive guidance emphasizes that actual delivery requires the customer to obtain possession and control and for the offeror not to retain any interest after 28 days. Buyers evaluating financed purchase options should confirm whether the platform structure satisfies this test.

Regulatory anchor and settlement comparison

Tokenized commodities typically move on public chains in minutes, while US securities markets operate on a one‑business‑day settlement standard, a change that took effect on May 28, 2024. Understanding this delta is useful when comparing liquidity, financing costs, and arbitrage mechanics across on‑chain and off‑chain markets.

Tokenized Commodities vs Commodity‑Backed Cryptocurrencies

Confusion persists between tokens that convey ownership or a specific claim on reserved inventory and tokens that simply reference a commodity’s price.

Title and beneficial ownership

Some gold tokens use terms that explicitly frame the token as a form of warehouse‑receipt‑like claim. For example, PAX Gold states that each token represents one fine troy ounce of London Good Delivery gold held on a segregated basis for token holders, and describes PAXG as akin to a warehouse receipt conferring beneficial ownership in allocated gold. That framing distinguishes title‑bearing tokens from products that merely promise price exposure or hold reserves without passing through legal title to holders. Buyers should always read the issuer’s terms to see whether they obtain ownership, a security entitlement, or only a contractual right against the issuer.

Redemption paths and minimums

Redemption mechanics signal the rights you actually have. PAXG permits redemptions into unallocated Loco London balances or into allocated Good Delivery bars, with physical bar delivery requiring a minimum of approximately 430 ounces plus fees. Operational notes specify that physical deliveries are routed to approved vaults in the UK.

Tether Gold (XAUT) positions each token as one troy ounce of gold and states that physical redemption is available in full bar increments, typically advising holders to accumulate about 430 XAUT to redeem, with delivery available to Swiss addresses. These bar‑sized minimums and jurisdictional limits are common across allocated‑bar redemption programs.

Compliance matters

Most issuers require full KYC for conversions and redemptions. PAXG’s terms, for example, limit conversion and redemption to verified customers and reserve rights to refuse service if required by law. Buyers who intend to exit via physical redemption should plan for onboarding, identity verification, and processing timelines.

Benefits, Risks, and Settlement Mechanics

Benefits

• Fractional access and programmability. Tokenization turns large lots like 400‑plus‑ounce gold bars into divisible, transferable units that can integrate with wallets and smart‑contract workflows for collateralization, compliance screening, and conditional transfers.
• Transparency. Some issuers publish monthly attestations and bar‑level allocation tools.
• 24/7 mobility. Tokens can be transferred globally without waiting for market hours.

Settlement context

On public chains, transfer settlement can be near‑instant subject to network conditions, while US securities trades are now on T+1. Faster settlement reduces counterparty and credit exposure, but it also shifts operational challenges such as error correction and cutoff management. Evaluating treasury operations alongside token settlement speeds is prudent for institutions.

Key risks to underwrite

• Liquidity and stress premiums. Tokenized gold can trade at notable premiums or discounts during market stress, especially when redemption and primary issuance pipelines are capacity constrained. During April 2024 Middle East tensions, PAXG traded at a premium exceeding 20 percent to spot gold on some venues, illustrating how fragmentation and on‑chain demand spikes can decouple tokens from the underlying metal price.
• Oracle and liquidation risk. DeFi integrations depend on robust price data. Institutions should review data‑source diversity, update thresholds, and heartbeat parameters documented for Price Feeds. For gold collateralization, using an XAU/USD price feed with appropriate safeguards can help reduce erroneous liquidations, but it does not eliminate market risk.
• L2 downtime and fair‑market protections. Tokens bridged to or native on rollups inherit sequencer availability risk. Monitoring L2 Sequencer Uptime Feeds and incorporating grace periods or pausability helps avoid unfair liquidations when the sequencer is offline.
• Redemption and logistics. Bar‑size minimums, shipping restrictions, and KYC timelines can impede rapid exits to physical. Buyers should validate operational playbooks well before they need them.

Custody, Attestations, and Redemption Workflows

How to read issuer attestations

For gold tokens, monthly attestation reports from independent auditors or accountants are common. Paxos publishes monthly PAXG attestations and provides a Gold Allocation Lookup that maps on‑chain addresses to bar serials. Paxos also discloses that its vault provider maintains insurance against loss of gold held in custody for token holders. When reviewing attestations, confirm the examination standard, the period‑end time, and whether the attester is independent of the issuer.

Testing redemption end‑to‑end

PAXG offers three paths: convert to USD, convert to unallocated gold, or redeem for allocated bars with a minimum of about 430 ounces plus fees, with deliveries routed to approved UK vaults. Tether Gold describes physical redemption to Swiss addresses in bar‑sized increments, typically advising holders to deposit roughly 430 XAUT to ensure full bar allocation before settlement. Before allocating capital, walk through the steps in a small‑value test where feasible and document fees, minimums, and timelines.

US consumer example beyond gold ETFs

The WisdomTree Gold Token is presented as a digital token representing a direct ownership interest or electronic document of title to physical gold, with custody at HSBC and records on Stellar and Ethereum. WisdomTree provides public attestation links and discloses that physical metal conforms to LBMA standards. The model illustrates a consumer‑facing approach that emphasizes title, custodian segregation, and transparency.

Global regulatory context

In the EU, the Markets in Crypto‑Assets Regulation (MiCA) applies from December 30, 2024, with special regimes for asset‑referenced and e‑money tokens effective since June 30, 2024. Tokenized commodity issuers operating in or marketing to EU users should assess whether their products fall within MiCA categories and related obligations.

Buyer Due‑Diligence Checklist

• Verify legal rights. Do the token terms grant title or beneficial ownership in allocated inventory, or only price exposure? Read the governing terms, not the marketing site. Look for language referencing warehouse‑receipt‑style claims and allocation rights.
• Custodian and vault. Identify the custodian, vault jurisdiction, and whether inventory is allocated and insured. Confirm monthly or periodic attestations and, for gold, test bar‑level allocation lookups.
• Redemption. Document minimums, geography, fees, and timelines. For gold tokens, bar‑sized redemptions often require roughly 430 ounces and may restrict physical delivery to specific locations such as the UK or Switzerland.
• Market structure. Assess typical spreads and venues. Recognize that premiums and discounts to spot can widen under stress, creating basis risk for hedged strategies.
• Oracle and chain risk. Identify which oracle networks and configurations are used, including deviation thresholds and heartbeats. Incorporate circuit breakers tied to Proof of Reserve and consider publishing reserves, NAV, or AUM onchain via SmartData feeds. If integrating on rollups, monitor L2 Sequencer Uptime Feeds.
• Regulatory fit. For US retail, determine whether any financing or margin is involved that could trigger CEA section 2(c)(2)(D) and the 28‑day actual‑delivery test. For the EU, assess MiCA implications, especially if tokens might be characterized as asset‑referenced or e‑money tokens.

Sector Examples and Outcomes

Gold exemplars

• PAX Gold. Tokens represent one fine troy ounce of allocated London Good Delivery gold held on a segregated basis. Paxos publishes monthly attestations, provides allocation lookup by wallet address, and defines redemptions into unallocated or allocated gold with bar‑size minimums.
• Tether Gold. Each token represents one troy ounce, with allocation traceability and physical redemption available for full bars with delivery to Swiss addresses. Issuer communications and attestations describe storage in Swiss vaults and bar‑sized redemption mechanics.

US consumer model

• WisdomTree Gold Token. The product is positioned as an electronic document of title, with custody at HSBC and records on Stellar and Ethereum. Public attestations and consumer disclosures highlight segregation and LBMA standards. This structure gives buyers a clear path to verify custody and rights without implying regulatory approval.

Non‑US issuance and provenance controls

• Comtech Gold on XDC. Tokens represent one gram each and are backed by 1 kg bars registered with DMCC Tradeflow. Each bar carries a Tradeflow warrant that adds provenance and financing utility, demonstrating how registry infrastructure can enhance the quality and traceability of tokenized bullion.

​

Chainlink’s Role in Tokenized Commodities

Many operational risks in tokenized commodities relate to data, cross‑chain movement, and L2 availability. The following patterns illustrate risk‑mitigating infrastructure that builders and buyers can request or verify:

• Market data for collateral. For gold collateralization and valuation, institutions can reference an XAU/USD price feed and review the decentralized data model and update parameters in Price Feeds. These integrations improve resilience to single‑source failures while keeping governance transparent.
• Reserve verification and circuit breakers. Issuers and protocols can publish onchain reserve, NAV, and AUM signals using Proof of Reserve and SmartData feeds. Automated checks can halt minting or trigger controlled pauses when off‑chain collateral reports fall outside pre‑set thresholds. These are mitigations that complement, not replace, audits and regulatory oversight.
• Interoperable settlement. Institutions exploring cross‑chain delivery‑versus‑payment can review a CCIP case study that demonstrates cross‑chain tokenized asset settlement, showing how stable settlement semantics can be preserved across networks.
• L2 outage risk. Sequencer downtime on rollups can cause asymmetric markets. Monitoring L2 Sequencer Uptime Feeds and integrating grace periods into liquidation logic helps avoid adverse outcomes during outages.

Frequently Asked Questions

How does a tokenized commodity trade and settle, step by step?

An issuer or custodian holds inventory, mints tokens against it, and tracks allocations. Buyers acquire tokens on exchanges or OTC, transfer them on‑chain with block‑level settlement, and later redeem to cash or physical inventory according to program rules. Transfers can settle in minutes on public chains; by contrast, US securities follow T+1 settlement that became effective on May 28, 2024.

In the US, when do tokenized commodity transactions fall under CFTC oversight?

If a retail transaction in a commodity is offered with leverage, margin, or financing, it can be treated as if it were a futures contract unless the transaction results in “actual delivery” within 28 days. The CFTC’s interpretive guidance specifies that actual delivery requires the customer to obtain possession and control and for the offeror to relinquish all interests by day 28.

What are typical redemption minimums and where can delivery occur for tokenized gold?

Programs that redeem into allocated Good Delivery bars commonly require bar‑sized minimums around 400 to 430 ounces. PAXG lists a 430‑ounce minimum for physical bar redemption with deliveries routed through UK vaults, while XAUT advises holders to accumulate about 430 XAUT and offers delivery to Swiss addresses. Always confirm the latest thresholds and fees in the issuer’s documentation.

Why can tokenized gold trade at a premium to spot during stress?

On‑chain demand can overwhelm available secondary‑market liquidity, while frictions in redemption or primary issuance slow arbitrage. During April 2024 Middle East tensions, PAXG traded at more than a 20 percent premium to the New York gold close on some venues, illustrating temporary basis dislocations.

Does MiCA apply to tokenized commodities in the EU?

MiCA applies from December 30, 2024, with rules for asset‑referenced and e‑money tokens in force since June 30, 2024. Whether a tokenized commodity falls within MiCA depends on legal structuring and whether it meets the definitions of regulated token types. Issuers marketing in the EU should conduct a MiCA impact assessment.