ABX withdraws from its collaboration with Digital Gold Limited (BullionCoin)

GoldVu's Managing Director's Comment

After a great lead up to and anticipation of BullionCoin's launch, ABX released a surprise statement severing ties with BullionCoin.

Following that surprise e-mail, I have had great conference calls with the co-founders of BullionCoin and the CEO of ABX.

We discussed each of ABX's points in detail. I have requested from BullionCoin a complete list of documentation relating terms & conditions of business, account agreements and vaulting operations, which I will assess independently focusing in particular on the concerns of ABX.

My initial review of ABX's statement >

Point 1:

My understanding is that clients that hold precious metals at ABX are also technically just creditors that have a claim on the vaulted bullion. No ABX client can point at any specific bar and say "that's mine". The ABX vaulted metal is technically only "allocated" on ABX's own books, therefore all clients with allocated bullion are technically just creditors.

Only clients with segregated holdings are truly not creditors, something which ABX does not offer.

  • Unallocated is when the metal, bought or not, is owed to you and is an asset that sits on the balance sheet of the company. That is how banks operate, on a promise to pay.
  • Allocated is when the metal exists in a 1:1 match with what is written in the company's books for their client accounts and is in no way a part of the company's balance sheet.
  • Segregated is when the serial numbers are issued and the metal is physically separated into client specific piles and definitely not part of the generic allocated pile of metal and does not exist on the company's balance sheet.

As far as I can see there is no real difference between the way ABX and BullionCoin hold their metal, which is allocated.

The only immediate difference is that ABX holds the metal in a trust and BullionCoin holds it on a custodial basis (which is how the majority operate).

As long as the clients assets are clearly defined as separate from the balance sheet of the business, both methods of holding client assets (via a Trust or on a Custodial basis) mean the allocation to the client only exists on the company books.

Point 2:

This part of ABX's statement seems too broad and is another area that ABX could be more specific on.

BullionCoin has employed some 30 top software developers that are the experts in their fields of cryptography, security and blockchain. Whilst possible, it's highly unlikely that BullionCoin's system will be so widely flawed in the manner stated.

It's possible that ABX weren't fully aware of BullionCoin's level of applied security. This is the one area that I haven't covered with ABX yet.

Point 3:

BullionCoin stated they are not aware of any legal action whatsoever.

The only reference to Intellectual Property / Patents that BullionCoin knew of was a brief community discussion in one of GoldMoney's forums. I read that same thread about 3 weeks ago and queried it with BullionCoin back then and again today.

BullionCoin said they have consulted several patent lawyers on GoldMoney's / Bitgold's patents before starting development, and they say that nothing that BullionCoin have done infringes on any patent at all. They advise that they do not believe there are any grounds for any legal activities against BullionCoin from anyone relating to IP.

ABX haven't been able to confirm with me any specifics relating to this point.

Point 4:

This point relates to the fact that BullionCoin have their own private vaulting facility in Geneva.

ABX admitted that technically there is nothing wrong with that as I cited similar situations such as companies like Gold Switzerland run by Egon Von Greyez.

ABX's issue with this cycled back to their concern in point 1.

Relating to metals deposited into BullionCoin, they will only accept deposits into their vaults that are from existing secure providers like GoldMoney, GoldCore or Perth Mint etc. and even then it has to be accompanied with documents and certificates. Depending upon the provider's storage T&Cs, BullionCoin may also request an entry audit before authorising the collection from those places.

Any other precious metals will need to go via a refinery to be smelted and reissued by the refinery in order to verify the metal content.

ABX haven't confirmed with me their specific concerns relating to quality control of metal held in ABX's vault.

Point 5:

I can't comment on this as I have no idea about what a standard or non-standard matching system is and I didn't get around to asking Thomas at BullionCoin about this part,  so I'll need to do some digging into what that means.

Point 6:

If BullionCoin have been making drastic changes to their white paper on an on-going basis right up to launch, then it could be an indication that their operating mechanisms are not as stable as one should expect.

I have requested documentation and all previous versions of the white paper so that I can track the changes that have happened over time and see if ABX's concerns are justified.

In Summary

I, like you, was very surprised at ABX's unexpected statement.

I have watched several webinars over the last few weeks that involved ABX's CEO stating how incredibly pleased he was about BullionCoin and how much they are behind it, supporting the concept and its integration into MetalDesk. I was quite shocked to see such a strong and sudden turn around.

In such circumstances it is not good to do any emotional knee-jerk reactions, but approach this in an objective, methodological and analytical approach, which is what I am going to do.

Nevertheless, ABX have a great concept and system in supplying wholesale allocated bullion outside the traditional bullion system, and on the face of it, I still believe that BullionCoin also has an equally great concept that will shake up the incumbent system too.

Until I am able to verify or dismiss the different points highlighted by ABX, I recommend just waiting a little until I'm able to complete my care & due diligence and come back to you with my decision. This will take several days to complete.

Please do contact me if you have any questions about this and I will be happy to answer them.

Yours faithfully,

David Gibson

Managing Director, GoldVu

ABX's Statement:

Allocated Bullion Exchange ('ABX') has issued this statement in response to questions from our Members, their customers, stakeholders, potential BullionCoin investors, and the precious metals industry at large, concerning the release of Digital Gold Limited's ('Digital Gold') BullionCoin digital asset product.

Regrettably, and effective immediately, ABX's Board has today, Tuesday the 15th of August 2017, resolved to cease any further collaboration with Digital Gold.

This action was not taken lightly, but rather, as a result of recently obtained information, as well as ABX's inability to reconcile material risks to supporters of the BullionCoin product structure due to the following factors:

1.    Against strong advice from ABX, Digital Gold was insisting to structure its metal ownership so that investors in the digital asset would be, in our view, unsecured creditors of Digital Gold. This form of ownership is commonly referred to as an 'unallocated' holding, and results in the investor only having a 'claim' to the metal, as opposed to having ownership of the asset and being protected in the event of a Digital Gold default. It has long been ABX's view that this model is inherently flawed and would result in genuine counterparty risk to holders of BullionCoin. A detailed explanation of 'allocated vs. unallocated' metal ownership and the substantial risks associated with unallocated metal, can be found here;

2.    ABX has been unable to satisfy itself regarding the security and integrity of Digital Gold's bullion holdings structure and thus ABX is of the view that there are risks similar to other flawed cryptocurrency businesses in recent times where investors have lost significant amounts of money;

3.    ABX have received confirmation that a competitor of Digital Gold intends to initiate legal action against Digital Gold upon the launch of BullionCoin due to alleged infringement of intellectual property rights. This, in our view, would have the potential to put at risk all BullionCoin-backed unallocated bullion, to the detriment of BullionCoin holders and investors;

4.    Digital Gold is insisting on utilising private vaulting networks that, in ABX's view, would permit external bullion deposits with limited quality verification, thereby circumventing, and being not subject to ABX's robust bullion framework for assuring the quality of the bullion in its network;

5.    Digital Gold is developing and utilising a non-standard matching engine and order book within its BullionCoin System ('BCS') secondary market which, in our view, will result in an atypical trading experience that ABX believes will cause confusion and disputes;

6.    Digital Gold has made frequent and substantial scope of project amendment requests and in ABX's view, has been unable to meet any mutually agreed project development timelines; and

7.    ABX's unwavering commitment to allocated and transparent precious metal ownership. 

ABX is disappointed that it has been forced to withdraw from this collaboration. Unfortunately, ABX believes that it simply had no alternative as it found itself in the untenable position whereby the mechanics of the business model originally pitched to ABX were not what Digital Gold ultimately delivered.

ABX intends to continue work to support and / or launch its own precious metal backed digital currency. The experience with Digital Gold has resulted in the Board forming a view that they do not have the expertise or experience or professionalism to launch a product or service which will adequately satisfy the needs of ABX's stakeholders. Based on ABX's experience, and the legal advice taken, ABX is recommending to its stakeholders that they do not work with Digital Gold for the reasons stated above.

On a positive note however, ABX has recently been contacted by several other bullion-backed digital currency providers who have identified ABX as the market leading facility for allocated physical precious metals. Now that ABX has withdrawn from the Digital Gold collaboration, the Board has approved collaborations with several other advanced stage allocated precious metal digital currency providers.

To this end, ABX is pleased to announce that it will be issuing a press release to its stakeholders on these new collaborations and partnerships in the immediate future.

Allocated Bullion Exchange

Authored by David Gibson:

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