The London Metal Exchange (LME) has begun exploring plans to tokenize metal stored in its Hong Kong warehouses, potentially allowing businesses to use digital representations of physical inventories as collateral for financing.
Summary
- The London Metal Exchange is exploring tokenization of off-warrant metals held in Hong Kong warehouses.
- Proposed digital representations could allow businesses to secure loans using physical metal inventories.
- HKEX is targeting a 2027 pilot for tokenized warehouse-receipt financing with designated banks.
- Hong Kong’s commodity strategy includes new warehousing capacity, tax incentives and blockchain-based collateral management.
- HKEX is developing a multi-asset tokenization platform incorporating carbon credits and commodity warehouse receipts.
In an October 28 report, Reuters cited three people familiar with the discussions who linked the initiative to Hong Kong’s plans to become an international commodities trading center. The proposal would cover metal held outside the exchange’s warrant system, giving traders another route to obtain funding against their inventories.
LME officials confirmed that discussions were underway but described the project as exploratory. The exchange has scheduled a private industry roundtable for early November, where stakeholders are expected to examine the proposed financing arrangements.
LME targets off-warrant metals for tokenization
A central part of the proposal concerns off-warrant metal, which refers to inventory held in approved warehouses without an active LME warrant. Unlike warranted metal, it lacks a standardized financing arrangement through the exchange’s existing system.
Warrants function as title documents covering specific quantities of metal and can already support trading or secured borrowing. Under the proposed arrangement, digital tokens would represent eligible off-warrant inventory, allowing businesses to pledge those assets when seeking loans.
Responding to questions about the initiative, the LME acknowledged that it was examining tokenization to support financing and would consult industry participants before settling on an approach.
Chief Executive Matt Chamberlain had previously discussed the technology during LME Week Asia in May. Although the exchange has now outlined the type of inventory it wants to address, the proposed framework remains under development.
The LME has required warehouses to report off-warrant inventories since 2020, a measure introduced to provide additional information about available industrial-metal supplies. Copper and aluminum are among the commodities covered by its warehouse reporting system.
Hong Kong plans tokenized warehouse financing for 2027
Hong Kong’s September policy address provides a more detailed timetable for commodity-backed financing.
The government said Hong Kong Exchanges and Clearing (HKEX), which acquired the LME in 2012, was working toward a pilot for tokenized warehouse-receipt financing with designated banks in 2027.
According to the official policy document, the pilot will use physical tracking technology to support loans secured against commodity inventories. HKEX is separately developing a blockchain-backed platform designed to handle several types of tokenized assets.
The platform already incorporates carbon credits listed on Core Climate, while warehouse receipts from LME-approved facilities are scheduled for inclusion in a pilot next year. The government expects the system to support collateral management across different asset categories.
Hong Kong reported more than 60,000 square meters of warehouse space and inventories exceeding 20,000 metric tons after joining the LME’s approved delivery network in 2025.
Officials intend to encourage additional approved warehouses in the Northern Metropolis, alongside proposed tax concessions for physical commodity trading. The development program includes financing, storage, risk management and customs arrangements.
Hong Kong expands its tokenized commodities business
Hong Kong’s commodities initiative follows China’s 15th five-year plan, published in March, which explicitly supports developing the city as a major trading center for physical commodities.
The September policy address calls for using Hong Kong’s position within the LME warehousing network to develop related trading and financing services. The exchange is examining whether to permit outdoor aluminum storage in the territory, despite concerns about weather exposure and security.
Other commodity businesses have already introduced blockchain-linked products in Hong Kong. On October 27, crypto.news reported that the Hong Kong Gold Exchange was integrating Chainlink technology to support cross-chain transfers of its XGZ gold token.
Each XGZ represents one gram of physical gold, with eligible holders able to request physical redemption subject to the issuer’s requirements. That initiative concerns gold-backed digital tokens, separate from the LME’s proposed industrial-metal financing system.
Tokenized metal collateral attracts financing providers
Interest in using physical commodities as blockchain-based collateral has spread to lending and capital markets.
In August, Bitfinex Securities completed a $50 million tokenized capital raise for Alkemya, using a security linked to a partnership holding nickel assets independently valued at approximately $1.64 billion.
The transaction involved investment interests tied to existing metal assets, while the LME proposal focuses on financing inventories through warehouse-backed digital representations.
Elsewhere, tokenized gold has entered secured lending. Arch Lending introduced loans backed by PAXG and XAUT, accepting the tokens as collateral at loan-to-value ratios of up to 75%.
Arch’s CEO, Himanshu Sahay, described growing demand for using tokenized gold as borrowing collateral. Its arrangement places pledged assets with Anchorage Digital and uses liquidation procedures when collateral values fall below required levels.
In Hong Kong, the government’s planned 2027 warehouse-receipt pilot will involve designated banks, while HKEX’s blockchain platform is expected to incorporate commodity receipts from approved warehouses alongside its existing carbon-credit assets.
