How Physical Redemption of Tokenized Commodities Works

How does physical redemption of a tokenized commodity work? A holder of enough tokens to meet the product's minimum lot submits a redemption request, completes identity and delivery checks, and transfers the tokens to the issuer's redemption contract. The custodian releases the identified metal, documentation such as warehouse receipts and assay certificates is transferred, and the commodity is delivered or made available for collection at an approved location. The redeemed tokens are burned so that supply always matches the metal still held. The whole process typically takes days to a few weeks, depending on location and logistics.

Why redemption matters

Redemption connects the digital claim to the physical commodity. Even holders who never intend to take delivery benefit from it, because the right to redeem allows arbitrage: if the token trades well below the value of the metal, someone can buy tokens, redeem them and sell the metal, pushing the token price back toward the physical price. A token that cannot be redeemed for anything is only a promise from its issuer.

Step by step

1. EligibilityThe holder must be onboarded for the product, meaning identity, sanctions and any suitability checks are complete, and must be entitled to receive the commodity in the delivery jurisdiction. Some products restrict redemption to certain participant types or locations.
2. Minimum lotRefined copper moves in cathode bundles that typically weigh one to three tonnes, and exchange lots are 25 tonnes on the LME and about 11.3 tonnes on COMEX. Products therefore set a minimum redemption quantity, often one metric tonne or a multiple of bundle size. Holdings below the minimum are typically settled in cash at the reference price or aggregated with other holders where the product allows.
3. RequestThe holder submits a redemption request through the issuer's portal, specifying quantity, delivery location and logistics preference (collection at the warehouse or delivery to a nominated address). The request locks the tokens so they cannot be transferred while it is processed.
4. VerificationThe issuer confirms the holder's eligibility, that the tokens are unencumbered and that the requested quantity is available at the chosen location. Fees are calculated and disclosed: handling, documentation, insurance, freight if delivery is requested, and any taxes or duties.
5. AllocationThe custodian identifies the specific cathode bundles (by bundle number, brand, weight and assay) to be released against the tokens. For pooled structures this is the moment metal becomes allocated to the redeeming holder.
6. Token transfer and burnThe holder transfers the tokens to the redemption contract. Once the release is confirmed, the tokens are burned, permanently removing them from circulation so that total supply continues to equal metal in custody.
7. DocumentationOwnership of the physical metal passes to the holder through the transfer of warehouse receipts or warrants, together with assay certificates, weight lists and, where relevant, certificates of origin needed for customs or responsible-sourcing requirements.
8. DeliveryThe metal is either released for collection at the warehouse (free on truck) or shipped to the holder's nominated location under the agreed terms. Insurance and risk of loss transfer at the point defined in the product documentation.
9. ConfirmationThe holder confirms receipt; the issuer records the completed redemption on-chain and updates the published reconciliation of tokens to inventory.

Where the metal is

Physically backed copper is held in bonded warehouses, exchange-approved delivery points and independent custodian facilities. Location affects redemption in three ways: the regional premium that applies to metal in that market, the freight cost to the holder's destination and the import duties or taxes that may arise when metal leaves a bonded zone. Products typically publish the list of approved locations and any location-specific terms.

Fees and timing

Redemption fees cover the custodian's handling and documentation, insurance to the point of transfer, freight if delivery is requested and administration. They are disclosed in advance and are usually small relative to the value of a tonne of copper, but they make very small redemptions uneconomic, which is another reason for minimum lots. Timing depends on location: collection at the warehouse can be arranged within days once verification is complete, while international delivery may take several weeks.

Redemption of future-production tokens

Tokens that represent scheduled future production cannot be redeemed until the metal exists. In Toto Finance's design, such tokens convert into physical commodity tokens when the producer delivers cathode into custody and the metal is verified. From that point they redeem in the same way as any physically backed token. If production is delayed or falls short, the terms defined at issuance govern what happens, which is why production and delivery risk must be disclosed for these tokens.

Cash settlement as an alternative

Many products offer cash settlement at the reference price as an alternative to physical delivery, either for holdings below the minimum lot or for holders who prefer it. Cash settlement does not replace redemption rights; it complements them. A product that offers only cash settlement is not physically redeemable and should be described as such.

Questions to ask before relying on a redemption right

• What is the minimum quantity, and what happens to smaller holdings?
• Which locations are approved, and who bears freight, duties and taxes?
• Who holds the metal, under what legal structure, and is it segregated from the issuer's own assets?
• What documentation transfers with the metal?
• Under what circumstances can redemption be suspended, and for how long?
• How and how often is the reconciliation of tokens to inventory published?

Proof of reserves addresses the evidence behind the last question. Nothing in this article is investment, legal or tax advice; see risk disclosures.