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Category: Glint's Helpful Hints

Glint’s Helpful Hints: Counterparty risk

Since 2008, we have all become more sensitised to the threats from Counterparty Risk, the risk that the other party in an investment, credit or tradin...

18 August 2022

Gary Mead

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Since 2008, we have all become more sensitised to the threats from Counterparty Risk, the risk that the other party in an investment, credit or trading transaction might default or otherwise renege on its contractual obligations. It emerged that banks were highly exposed to collateralized debt obligations (CDOs). When mortgage borrowers began to default, the banks were left on the hook for the losses. As banks toppled like dominoes, issues of counterparty risk swiftly emerged – who was defaulting on what, to whom, and by how much? This led to a severe collapse of the overall economy.

We live in a world surrounded by contracts, which is a model of transactions based on trust (but enforceable by law). When we buy goods at a supermarket, or when we use a utility to buy electricity; we depend on people entering into and fulfilling their contracts with us.

For any type of paper-based investment, where no direct assets are involved, e.g. shares, bonds, traded funds, etc. there is always a degree of counterparty risk. This is true of ‘gold-backed’ exchange traded funds (ETFs) – the counterparty risk is that the trust (which actually owns the gold) could default. Bitcoin solves counterparty risk but other parts of cryptocurrency business – such as exchanges – carry their own counterparty risk. There have been many examples of Bitcoin exchange collapses over the years.

Physical gold and silver have no counterparty risk. The ownership of physical precious metals involves no ‘other party’ who might default on payments or go bankrupt; no boards of directors are involved; and they are not subject to the many manipulations potentially affecting other investment assets.

But possessing physical gold/silver can be a drag – literally, because they are heavy. And there are insurance costs, storage headaches, theft worries on top of that. And it is extremely difficult to use the gold as money – getting a sliver from your physical bar to pay for a coffee is challenging.

That’s why we promote Glint. With Glint, the gold in your account is allocated to you, there’s no counterparty risk; even if the vault it is stored at in Switzerland goes into default, you are still legally entitled to the gold you own. Moreover, you can spend gold on your account as you would any fiat currency (you can hold Dollars, Euros and Pounds Sterling as well as gold), in any amount, no matter how small, you like. So not only no massive weight tearing at your pocket, nor any storage or security concerns, and there’s no counterparty risk.

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