The illusion of paper gold: Why billions in financial assets can vanish in seconds during a crisis

The gold market is experiencing a moment of euphoria. The price of the precious metal has surged over 80% in the last 12 months, attracting investors of all profiles in search of wealth security. But there is an uncomfortable reality that few discuss: 98% of this gold exposure is not real gold. It’s paper. And this paper can disappear very quickly when confidence in the financial system vanishes.

Björn Schmidtke, CEO of Aurelion — Tether’s gold treasury division — issued a warning about this vulnerability. While most investors believe they own physical gold bars when purchasing exchange-traded funds (ETFs) or other “paper gold,” they actually only hold promises of delivery. And promises may not be honored when needed.

The real problem: You don’t know which bar you own

When someone buys a gold ETF or a similar product, the transaction is simple and quick. Click a button and, in seconds, the asset appears in your portfolio. It seems like you’ve acquired physical gold. But what you’ve actually bought is what Schmidtke calls “a small piece of paper that says: ‘I owe you gold.’”

The system works as long as few try to redeem. Billions of dollars in “paper gold” circulate in the form of securities and derivatives, with the rarely tested promise of being convertible into physical gold. The reality, however, is that investors are unaware of which specific gold bar belongs to them. There is no proof of individual ownership. Only a certificate stating they hold a share in the fund.

It’s like someone selling you a contract promising a housing unit, without telling you which apartment it is, where it’s located, or when it will be delivered. You would only have the promissory paper.

When panic hits: The collapse scenario in minutes

While the macroeconomic scenario remains stable, this structure continues to operate. But Schmidtke warns of a “seismic event” — a significant crisis that forces the exponential devaluation of fiat currency. At that moment, frightened investors would rush to convert their “paper gold” into physical gold. And that’s when the system collapses.

“You simply cannot move a few billion dollars in physical gold in a single day,” explains the CEO. Physical gold has weight, volume, and requires security. It cannot be transported at the speed of a click. But there’s an even bigger problem: without clear proof of which gold bar belongs to which investor, how would these bars be distributed? Who would have priority? How to avoid disputes?

Historical silver market data provides a frightening precedent. During times of extreme volatility, physical gold/silver premiums exploded while derivative prices remained frozen, leaving holders unable to liquidate their positions. “We believe the same will happen in the gold market if such an event occurs,” says Schmidtke.

Market sentiment data already shows warning signs. Indicators like JM Bullion’s Gold Fear and Greed Index are signaling extreme optimism in precious metals, even as Bitcoin and cryptocurrencies remain trapped in fear. This reveals a growing disconnect: investors worried about “real assets” choose physical gold and silver instead of digital assets, potentially creating two parallel markets with very different price dynamics.

Blockchain as a digital deed: Security and real-time traceability

The solution to this logistical bottleneck, according to Schmidtke, involves tokenizing gold via blockchain. Unlike traditional “paper gold,” tokens like XAUT (Tether Gold) represent specific and immutable allocations of gold bars stored in Swiss vaults.

Each XAUT token is inextricably linked to a specific gold bar. This linkage is the “digital deed” — cryptographic and traceable proof of ownership. When you hold an XAUT token, you know exactly which bar you own, where it’s stored, and can transfer ownership globally in seconds via blockchain. While physical gold can take hours or days to move, digital ownership is instant.

This detail is crucial: “How you own gold is as important as whether you own gold,” says Schmidtke. Verified ownership not only eliminates logistical bottlenecks but also establishes a clear hierarchy in crisis scenarios. If panic and rush to gold occur, token holders have unequivocal proof of ownership and can execute transactions in real time, without competing for delivery priority.

XAUT and the revolution of tokenized gold: Protection confirmed with each block

Aurelion has reshaped its treasury strategy with this vision in mind. The company migrated its reserves to XAUT, currently holding 33,318 tokens worth approximately US$153 million (current price: $5.54K per token).

The advantage of XAUT is not just theoretical. Unlike “paper gold,” tokens are fully redeemable in physical gold and represent specific, traceable allocations. Blockchain provides an immutable record of owner, quantity, and specific bar — something impossible in traditional ETF and derivative systems.

Schmidtke sees XAUT still in early adoption stages. There is significant room for expansion as more investors understand the fundamental difference between saying “I own gold” and actually having verifiable proof of that ownership.

Aurelion’s strategy is not short-term arbitrage. “It’s about building a durable wealth in tokenized gold that investors can participate in over time,” explains Schmidtke. The company plans to expand its reserves in the coming years, raising additional capital to increase its XAUT holdings.

The convergence of gold and Bitcoin: Complementary, not competing assets

While Bitcoin lags behind in 2025, traded as a highly volatile risk asset, Aurelion and other institutional players see gold and Bitcoin as complementary assets in building long-term defensive reserves. Gold offers stability and physical proof; Bitcoin offers decentralization and mobility. Together, they create a more robust wealth protection structure.

What is changing now is the possibility of having both in a verifiable digital format via blockchain. This allows investors to transfer value in seconds, avoid problematic intermediaries, and maintain cryptographic proof of ownership — features impossible with traditional physical gold or “paper gold.”

This is the core risk Schmidtke identifies: the current “paper gold” system worked as long as few tested its limits. But in a world where financial crises can trigger massive rushes to safe assets, the difference between having real proof of ownership and just a promise can mean billions in losses — or guaranteed protection. Tokenization doesn’t solve all problems, but it addresses one of the most critical: eliminating the gap between what you believe you own and what you can actually recover when needed.