Exclusive-LME plans metal tokens push tied to Hong Kong's 5-year plan, sources say

By Pratima Desai

LONDON, Oct 28 (Reuters) - The London Metal Exchange is aiming to turn metal held in its Hong Kong warehouses into digital assets that can be used for financing, a move linked to the territory's five-year plan to expand its commodities hub, three people with knowledge of the matter said.

The initiative and connection to Hong Kong's development strategy have not previously been reported.  

Creating digital assets backed by metal is expected to attract investors, traders and financiers, a goal set out in the city's new five-year economic blueprint published in September, while giving the LME a new revenue stream, the people said. 

The world's largest and oldest forum for metals has been owned by Hong Kong Exchanges and Clearing (HKEX) since 2012, but has only recently started to move into China's orbit.

"The LME is at the early stages of exploring the tokenisation of off-warrant metal inventories to support financing of business," the London exchange said in response to a request for comment sent to the LME and HKEx. "We will be engaging with stakeholders as we formulate our plans."

The LME has arranged an invitation-only, in-person industry roundtable in early November to discuss the initiative, the three people said.

Metal on warrant, which is already backed by title documents that allow it to be traded or used as loan collateral, cannot be included in the initiative. Off-warrant stocks currently lack a standardised mechanism for financing.

Tokenisation, which LME CEO Matt Chamberlain mentioned in a speech at LME Week Asia in May, would create digital assets for metal held in the exchange's warehouses that can be used for financing — for example as collateral for loans.

The 149-year-old London exchange has required its warehouses to report off-warrant stocks since 2020. At the time it said the aim was to give the market transparency and a fuller picture of available supply of industrial metals including copper and aluminium.

LEVERAGING HONG KONG'S ADVANTAGES

Hong Kong's policy initiative has its roots in Beijing. China's 15th five-year plan, published in March, for the first time explicitly backs the development of a commodity trading powerhouse in Hong Kong.

"We will leverage Hong Kong's unique advantages as an approved delivery point within the London Metal Exchange's global warehousing network to drive the synergised development of more commodities-related trading, risk management, and financing businesses," Hong Kong said in its plan.

In January last year, the LME approved Hong Kong as a warehouse location despite metal industry concerns about rent being significantly higher than in other parts of Asia. 

It is also looking at relaxing its rules for Hong Kong to allow aluminium to be stored outside. It experimented with this briefly in the 1990s but ended the practice because of concerns about weather damage and security.

The Hong Kong exchange itself is testing how to turn carbon credits into digital tokens so trades can settle automatically in seconds instead of days. 

(Reporting by Pratima Desai; additional reporting by Amy Lv in Shanghai; Editing by Veronica Brown and Emelia Sithole-Matarise)