How commodity tokens are redeemed or settled: a factual explainer

Commodity tokens may be redeemed or settled in different ways depending on the issuer, the platform, and the product terms. Some tokens may allow holders to redeem for the underlying commodity, such as gold, while others may settle in cash or only allow users to sell the token on a trading platform.

The most important factor is that redemption is not automatic. A commodity token may be described as “backed” by a real-world asset, but that does not always mean every holder can take delivery of the physical commodity. Canadians should read the issuer’s terms to understand whether redemption is available, what minimums may apply, what fees may be charged, and what happens when a user sells, transfers, or settles the token.
 

A commodity token is a digital asset designed to represent exposure to a real-world commodity. This may include gold, silver, oil, or another physical asset, depending on the product.

In many cases, a commodity token is linked to an asset held by or for an issuer in custody. For example, a gold-backed token may be designed to represent a claim connected to physical gold stored in a vault.

However, the term “backed” may mean different things depending on the legal structure. A token may represent allocated commodity holdings, unallocated commodity exposure, a contractual claim against an issuer, or another form of product-specific right. The details matter because they determine what the holder can actually do with the token.

Redemption means converting the token into something else under the issuer’s rules. Depending on the product, this could mean redeeming the token for:

• Physical commodity delivery.
• Cash or fiat currency.
• Unallocated commodity exposure.
• Another form of account credit.
• A transfer to a related product or account.

For example, a gold-backed token may allow eligible holders to redeem tokens for physical gold bars, cash, or another form of gold exposure. However, the exact process depends entirely on the issuer’s terms.

Redemption is not a default assumption. Some commodity tokens are specifically designed for trading, not physical delivery.

Settlement refers to how a transaction is completed after a user buys, sells, redeems, or transfers a commodity token.

In basic terms, settlement is the process that makes the transaction final. On a trading platform, settlement may mean the buyer receives the token and the seller receives cash or another asset. In a redemption process, settlement may mean the issuer cancels or removes the token and delivers cash, commodity exposure, or the physical commodity according to the product terms.

Settlement may happen through blockchain transfers, platform records, issuer books, custodian records, or a combination of these systems. The exact process depends on the product structure and should be understood in advance.

Redemption and selling are not the same thing. Selling means the user sells the token to another buyer on a trading platform. The user receives the sale proceeds, usually in Canadian dollars, U.S. dollars, a stablecoin asset, or another supported currency.

Redemption means the user goes through the issuer’s formal process to exchange the token for whatever the issuer permits. This may involve forms, identity checks, minimum amounts, fees, processing times, and other requirements.

Many users may never redeem a commodity token directly. Instead, they may buy and sell it through a platform, similar to how they trade other digital assets.

Physical redemption means the holder can swap their tokens for the underlying commodity itself. In the case of gold-backed tokens, this may mean receiving physical bullion.

Physical redemption is often subject to strict conditions. These may include minimum redemption amounts, identity verification, shipping fees, storage fees, insurance costs, processing timelines, and location restrictions.

For many retail users, physical redemption may not be practical if the minimum redemption threshold is too high.

Cash settlement means the token holder receives money instead of the physical commodity.

For example, a user may sell a commodity token on a platform and receive Canadian dollars. In some products, the issuer may also offer a formal redemption process where eligible holders receive fiat currency based on the value of the commodity, less any applicable fees.

Cash settlement can be more practical than physical delivery because it avoids shipping, storage, insurance, and handling costs. However, the amount received may be impacted by market prices, spreads, fees, foreign exchange rates, and the timing of the transaction.

When a user trades a commodity token on a Canadian crypto platform, settlement often happens through the platform’s trading and custody systems.

For example, if a user buys a gold-backed token, the platform may debit the user’s cash balance and credit the user with a token. If the user sells the token, the platform may debit the token and credit the user with cash or another supported asset.

Issuer redemption is the process of redeeming tokens directly with the issuer or an approved redemption agent.

This process may require the holder to meet eligibility requirements, complete identity checks, submit redemption instructions, hold a minimum token amount, pay redemption fees, and wait for processing.