(Corrects paragraph 23 to say staff were let go, not fired)
* Royal Mint planned to issue up to $1 bln of digital gold
* Partner CME walked away from project
* Mint sought deal with cryptocurrency exchange
* Finance ministry saw plan as too risky
* More than 10 Royal Mint staff gone, project on ice
By Peter Hobson
LONDON, Oct 25 (Reuters) - Britain's Royal Mint has frozen plans to launch a digital gold token after a partnership with U.S. exchange group CME failed and the government vetoed a plan to have the tokens trade on a cryptocurrency exchange, three sources told Reuters.
The demise of the potentially ground-breaking project, named Royal Mint Gold (RMG), highlights the wariness of governments to become involved in the largely unregulated world of cyptocurrencies, which exploded into the public eye last year with the stellar rise of bitcoin.
As other mints and fintech startups race to set up similar products, it could squander the chances of Britain's Mint leading the field to build gold into a multi-billion dollar digital asset class.
It also reflects a cooling of enthusiasm towards digital assets at the CME, three sources said.
The project would have been the first time a government of a developed economy had become directly involved with a crypto currency exchange, analysts and traders said.
The 1,100-year old Mint announced its plan to issue tokens worth up to $1 billion on a blockchain-based trading platform run by CME in 2016, saying they would give investors an easy way to buy and trade physical gold held in its vaults.
Royal Mint Gold was to launch in the autumn of 2017, but CME decided at the last minute to pull out, leaving the Mint without a trading venue, sources said.
"CME's management changed, and they walked away, didn't want to get involved," one of the sources said.
When a blindsided Mint sought to save the project by partnering with a cryptocurrency exchange, Britain's finance ministry in early 2018 refused to permit it, seeing the union as too big a gamble with the reputation of the government and the Mint, the sources added.
The Mint is 100 percent owned by the government.
Asked for comment, the Mint said its digital gold had been due to launch in spring this year. "Sadly, due to market conditions this did not prove possible at this time, but we will revisit this if and when market conditions are right," it said.
A Treasury spokesman referred Reuters' questions to the Mint. CME said it was "continuing to assess client demand with our partner and have nothing new to report at this time."
Governments are wary of cryptocurrencies, and few international standards have emerged to tame extreme price volatility, regular thefts from exchanges and the risk that digital currencies could be used to launder money or finance terrorism.
In Britain cryptocurrency exchanges remain unregulated. Its finance ministry, central bank and financial watchdog are looking at whether rules are needed for cryptocurrencies and the use of blockchain technology in finance.
Gold is seen as a natural fit with cryptocurrencies because both assets attract investors looking for alternatives to state-sponsored monetary systems which they distrust.
The Mint's plan was similar to a type of digital money known as stable coins that are pegged to major currencies or other assets to avoid the volatility suffered by bitcoin and others.
The Mint had hoped to appeal to investors wanting digital assets but with the reassurance of a trusted issuer and to create a new revenue stream as use of mass circulation coins, its core business for more than a millennium, dwindles.
Royal Mint Gold also fit into a push by CME to develop digital asset classes and blockchain technologies. CME launched bitcoin futures contracts last year, one of the first to do so, and has invested in digital technology startups through a ventures arm.
But CME's priorities shifted after CEO Phupinder Gill retired in late 2016 and Sandra Ro, CME's head of digitisation, left in July 2017, sources said.
"There was a change in strategy," said one source, adding that digitisation was de-emphasised.
Asked to comment, CME said: "It is not correct to say we have 'de-emphasised' digitisation and remain committed to pursuing our digitisation strategy."
After the government vetoed the plan to trade Royal Mint Gold on a crypto exchange, the Mint's new chief executive Anne Jessop, appointed in February 2018, decided to shut the project down, the sources said.
Around four staff in London were let go in March and a further 7-8 lost in Wales, where the Mint is also based, in May. The project is now frozen, the sources said.
Meanwhile, others are launching rival products.
Australia's Perth Mint and the Royal Canadian Mint are involved with digital gold products that launched this year and trade using technology supplied by fintech startups. Both mints declined to say how much gold had been bought through these platforms.
Gold-backed cryptocurrencies have also proliferated, though none has yet achieved the success of cryptos such as bitcoin, Etherium and Ripple, which have attracted hundreds of billions of dollars in investment. (Reporting by Peter Hobson; Additional reporting by Thomas Wilson; Editing by Veronica Brown and David Evans)