Tokenized Gold and Commodities: How PAXG and Tether Gold Move Physical Assets On-Chain

Tokenized gold has grown from a niche experiment into a multi-billion-dollar asset class. As of October 2026, the combined market capitalization of tokenized gold products exceeds $5.5 billion, with two tokens accounting for roughly 90% of the market: PAX Gold (PAXG) issued by Paxos, and Tether Gold (XAUT) issued by TG Commodities, a subsidiary of Tether Holdings. Each token represents one troy ounce of LBMA Good Delivery gold held in professional vaults.

What makes tokenized commodities significant is not just that they digitize ownership. They compress settlement from days to seconds, remove brokerage intermediaries, and make fractional commodity exposure accessible to anyone with a crypto wallet. This article examines how tokenized gold works, how its reserve verification compares between issuers, and where the broader tokenized commodity market is headed.

How Tokenized Gold Works

The mechanics of tokenized gold follow a straightforward pattern: an issuer acquires physical gold bars that meet LBMA Good Delivery standards (350 to 430 troy ounces per bar, minimum .995 fineness), stores them in insured vaults, and mints ERC-20 tokens against those bars on a 1:1 basis. One token equals one troy ounce. Each bar is serialized, and token holders can look up the specific bar or bars allocated to their holdings.

The tokens trade 24/7 on centralized and decentralized exchanges, enabling price discovery outside traditional London and New York gold market hours. Unlike synthetic assets that derive value from derivatives contracts, tokenized gold tokens represent direct claims on allocated physical metal.

Creation and Redemption

Token creation works like an authorized participant mechanism in ETFs. Institutional users deposit fiat or transfer gold to the issuer, who mints new tokens against the deposited metal. Redemption reverses the process: tokens are burned, and the holder receives either cash settlement or physical gold delivery.

Physical delivery carries practical constraints. Both PAXG and XAUT require approximately 430 tokens (matching a single London Good Delivery bar) as the minimum for physical redemption. PAXG delivers to vaults in the United Kingdom, while XAUT delivers to vaults in Switzerland. Below that threshold, holders must sell tokens on the secondary market or redeem for cash.

430-ounce minimum: London Good Delivery bars range from 350 to 430 troy ounces. The 430-token redemption minimum ensures the issuer can fulfill delivery with a single bar. At a gold price above $2,700 per ounce, the minimum physical redemption exceeds $1.1 million: a feature designed for institutional participants, not retail investors.

PAXG vs XAUT: Comparing the Two Leaders

PAXG and XAUT dominate the tokenized gold market but differ in their regulatory frameworks, reserve verification practices, and fee structures. Understanding these differences matters for anyone evaluating real-world asset tokens.

XAUT leads by market cap, while PAXG offers more frequent attestations and US regulatory oversight. For users who prioritize transparency, the monthly attestation cadence and NYDFS supervision of PAXG may be decisive. For users on the Tron network or who prefer Tether's ecosystem, XAUT provides a familiar infrastructure.

Reserve Verification: Attestation vs Audit

A common misconception is that tokenized gold reserves are "audited." In practice, both PAXG and XAUT undergo attestations, not full financial audits. The distinction matters.

An attestation is a point-in-time confirmation that the number of tokens in circulation matches the amount of physical gold held in custody. An audit, by contrast, examines the issuer's entire financial position: liabilities, counterparty exposure, operational controls, and more. Neither Paxos nor Tether publishes a full public audit of the gold-token issuing entity.

Paxos Attestation Process

Paxos publishes monthly attestation reports verifying that the total supply of PAXG tokens matches the troy ounces of gold held in London vaults. Since February 2025, these reports have been issued by KPMG LLP. Additionally, Bureau Veritas conducts an annual physical inspection of the vaulted gold, though Paxos notes that this inspection alone does not attest to ownership, valuation, or total coverage.

Tether Gold Attestation Process

TG Commodities publishes quarterly attestation reports through BDO Italia. The Q1 2025 report verified 246,524 fine troy ounces in custody. By Q1 2026, reserves had grown to over 707,747 ounces backing a matching number of tokens, all stored in Swiss vaults. Each quarterly report includes confirmatory testing of a sample of gold bars by a qualified independent third party.

Attestation limitations: Both issuers' attestations confirm reserve adequacy at a single point in time. They do not guarantee that reserves remain fully backed between reporting dates, nor do they cover the issuer's broader financial health. Users relying on reserve attestations should understand that these are narrower in scope than a full financial audit.

Settlement: T+0 vs Traditional Commodity Markets

One of the clearest advantages of tokenized commodities is settlement speed. In traditional London OTC gold markets, spot transactions typically settle on a T+2 basis: the buyer pays and the seller delivers allocated gold two business days after the trade date. Futures contracts on exchanges like CME introduce additional settlement complexity, including margin requirements, daily mark-to-market, and delivery windows.

Tokenized gold settles in the time it takes for a blockchain transaction to finalize. On Ethereum, that is roughly 12 seconds. On Tron, about 3 seconds. The buyer receives tokens and the seller receives payment in a single atomic transaction: both legs complete or neither does, eliminating the counterparty risk inherent in T+2 settlement windows.

B2C2, a major institutional liquidity provider, launched tokenized gold OTC trading with T+0 settlement in 2026, describing the model as a natural fit for institutional desks that want gold exposure without the friction of traditional delivery logistics. Deloitte's 2026 outlook identified tokenized collateral and instant settlement as having clear operational relevance for intraday margin and risk management.

Tokenized Gold vs Gold ETFs

Gold ETFs like SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) have long provided investors with gold exposure without physical custody. As of mid-2026, GLD manages approximately $146 billion in assets, while IAU holds about $64 billion. Their performance closely tracks spot gold, with five-year annualized returns around 10.3% to 10.5%.

Tokenized gold offers a different set of tradeoffs.

For long-term holders, the absence of annual custody fees in tokenized gold is meaningful. GLD's 0.40% expense ratio compounds to roughly 2% erosion over five years. PAXG and XAUT charge nothing for holding, though gas fees, exchange spreads, and creation/redemption fees affect total cost of ownership.

The more significant difference is composability. Tokenized gold can be used as collateral in DeFi lending protocols, traded on automated market makers, or included in on-chain portfolio strategies. A gold ETF share cannot do any of these things without leaving the traditional brokerage system.

Beyond Gold: Tokenized Oil, Carbon, and Agriculture

Gold dominates tokenized commodities because it has clear quality standards (LBMA Good Delivery), low perishability, and high value density. But tokenization is expanding into other commodity classes, each with unique challenges.

Tokenized Oil and Energy

Tokenized petroleum products typically represent fractional ownership of oil reserves or mineral rights rather than barrels in storage. The physical settlement problem is harder than gold: oil varies by grade, location, and transportation logistics. Projects in this space tend to use fractional ownership models backed by revenue streams from extraction, rather than direct commodity-backed tokens.

Carbon Credits

Tokenized carbon credits attracted significant attention through projects like Toucan Protocol and KlimaDAO, which brought verified carbon credits from registries like Verra's Verified Carbon Standard (VCS) on-chain. Toucan's Base Carbon Tonne (BCT) pool allowed carbon credits to be deposited and minted as fungible tokens, making them tradeable on decentralized exchanges.

The carbon credit tokenization model faces ongoing challenges around additionality (whether the underlying offset represents genuine emissions reduction), vintage quality (older credits may represent less impactful offsets), and regulatory recognition. Traditional compliance carbon markets under the EU Emissions Trading System still operate separately from voluntary on-chain markets.

Agricultural Commodities

Agricultural tokenization is the earliest-stage category. Proposals include tokenized warehouse receipts for grain, coffee, and cocoa, enabling producers to use commodity inventory as on-chain collateral for working capital loans. The challenge is that agricultural commodities are perishable, quality-variable, and subject to local regulations on commodity storage and trading.

In early 2026, Brazilian development banks began exploring regulated carbon exchanges that allow carbon-backed financing for agricultural producers, potentially bridging sustainability credits and commodity finance. The broader tokenized commodity market reached an estimated $7.3 billion in total capitalization by early 2026, though gold still represents the vast majority.

Regulatory Classification: Commodity or Security?

The regulatory treatment of tokenized commodities varies by jurisdiction and depends heavily on how a token is structured. A token representing direct ownership of physical gold may be classified differently from one offering leveraged exposure or yield-generating features.

United States

In the US, the classification question centers on the relationship between the SEC and the CFTC. A token that represents ownership of a physical commodity may fall under CFTC jurisdiction, while one that embeds investment contract features could be classified as a security under the Howey test. In March 2026, the SEC and CFTC jointly treated sixteen major tokens as digital commodities through interpretive guidance, though this guidance could be revised by future administrations. The proposed CLARITY Act would write commodity classification into statute.

PAXG operates under NYDFS supervision, which provides regulatory clarity within New York but does not resolve federal classification questions. Paxos's position as a regulated trust company gives PAXG a clearer compliance story than many tokenized commodity products.

European Union

Under MiCA, a token that qualifies as a MiFID II financial instrument falls outside MiCA's scope entirely. A token referencing commodity values without qualifying as a financial instrument may be classified as an asset-referenced token. ESMA's guidelines require case-specific, substance-over-form analysis, meaning each tokenized commodity product must be evaluated individually.

United Kingdom

The FCA published a call for input on tokenized gold in September 2026, specifically examining whether products that confer ownership rights in physical gold should be classified as funds. The key test is whether the token involves pooling of assets: a structure where multiple token holders share ownership of undivided gold reserves may face different regulatory treatment than one where each token maps to specific, allocated bars.

Regulatory divergence ahead: The US, EU, and UK are each developing distinct frameworks for tokenized commodities. Issuers and platforms operating globally must navigate overlapping and sometimes conflicting requirements. This regulatory fragmentation is one reason the market remains concentrated in gold: it is the commodity with the clearest legal precedents for digital representation.

Risks and Limitations

Tokenized commodities carry risks beyond standard crypto market volatility.

• Issuer risk: if the token issuer becomes insolvent, the legal process for recovering underlying gold may be complex and jurisdiction-dependent
• Attestation gaps: monthly or quarterly attestations leave windows where reserve status is unverified, unlike real-time proof-of-reserve systems used by some stablecoin issuers
• Redemption friction: physical delivery requires verified accounts, minimum quantities, and logistics coordination, making it impractical for most retail holders
• Regulatory risk: a reclassification of tokenized gold as a security would require issuers to register with securities regulators, potentially disrupting existing market structures
• Smart contract risk: bugs in the token contract could freeze transfers or enable unauthorized minting, though both PAXG and XAUT have operated without contract exploits since launch
• Concentration risk: with two tokens controlling roughly 90% of the market, the tokenized gold ecosystem lacks the competitive diversity that strengthens traditional gold markets

What Tokenized Commodities Signal for On-Chain Settlement

The tokenized gold market demonstrates a principle that extends well beyond precious metals: real-world value can move on-chain with near-instant finality, transparent reserves, and global accessibility. The same settlement advantages that make tokenized gold attractive: T+0 clearing, atomic execution, and 24/7 availability: apply to any asset that can be reliably custodied and verified.

This is the same principle behind real-world asset tokenization on Bitcoin and the instant settlement capabilities of protocols like Spark, where Bitcoin and stablecoin transfers settle in seconds rather than days. Whether the asset is gold, dollars, or Bitcoin, the pattern is the same: move the value layer on-chain and let traditional infrastructure handle physical custody where needed.

For those interested in how instant on-chain settlement works in practice, the Spark developer documentation covers the protocol's approach to atomic settlement for Bitcoin and stablecoins. The broader trajectory of T+0 settlement for real-world assets is also covered in our research on tokenized treasuries and on-chain yield products.

This article is for educational purposes only. It does not constitute financial or investment advice. Bitcoin and Layer 2 protocols involve technical and financial risk. Always do your own research and understand the tradeoffs before using any protocol.