What SEBI Said About Digital Gold and Why It Matters to You

The last few years have seen a huge increase in interest towards digital gold in the country. After all, who doesn't like the idea of buying gold online in small amounts? Still, there are some concerns from gold regulators. The Securities and Exchange Board of India (SEBI) has issued a number of alerts and updates about digital gold and all investors need to be aware of these changes. In this piece, we analyse what SEBI has mentioned about digital gold, the regulation of digital gold in India and what this means to you.

What is Digital Gold?

There are a number of digital gold platforms that permit users to purchase small amounts of gold - even fractions of gold of ₹100 or even less - which is claimed to be backed by real physical gold kept in a secure vault. You won't have physical gold, but you will get a certificate of gold or a digital account to represent your investment. Unlike gold bars or sovereign gold bonds, you can purchase digital gold using just an app or a website.

SEBI’s Position on Digital Gold (“SEBI Digital Gold Warning”)

While popular, SEBI maintains that digital gold offerings do not yet fall under its purview. The main points are:

As per the Securities Contracts (Regulations) Act, 1956 (SCRA), not all digital gold products are considered ‘securities’. Consequently, digital gold is not under SEBI purview. 

In a recent statement, SEBI said:

“Such digital gold products may entail significant risks for investors and may expose investors to counterparty and operational risks.”

SEBI also mentioned, and RIAs have also claimed that digital gold should not be dealt with due to regulatory risk. 

Why is Digital Gold Outside SEBI’s Oversight?

Classification and safeguards:

In order to fall under SEBI’s purview, a product must be a “security” as defined under SCRA. In most cases, digital gold does not meet that qualification. 

There are concerns regarding the backing of physical gold, custody and audit, and counter-party risk, or what occurs when the issuing platform or vault collapses. 

Platforms offering digital gold are unregulated, meaning they lack the protections afforded to regulated securities, such as the ability to address grievances, provide disclosure, and so on.

What is changing in India regarding the regulation of Digital Gold?

Despite the Digital Gold regulation in India, there are changes in the structure and proposals:

SEBI has introduced the term “gold exchange” in which securities backed by gold in vaults, are to be electronically regulated via Gold Receipts.

As of September 10, 2021, and per SEBI's request, the exchanges barred broker-members from offering digital gold through stock-broker platforms. 

Currently, digital gold through non-broker wallets or via fintech apps remains permissible, however, the lack of regulation should be of concern to investors.

Why It Matters (Implications for You as an Investor)

The following are the implications of the SEBI stance as it relates to your finances:-

1. Regulatory Risk

The lack of regulation by SEBI means there are no safeguards for investors when purchasing digital gold. You obtain no protection for the purchase of gold as unregulated securities. If things go wrong with the platform, your options may be limited.

2. Transparency & Verification

Ask the following questions: Is your gold stored and tracked 1:1, and which vault is it stored in? Are the vault’s auditing records up to date? In the absence of a gold standard regulation, answers may be limited.

3. There Are Other Options

If you are after regulated exposure to gold, you may opt for gold ETFs and sovereign gold bonds (SGBs) as they are operationally safe and regulated, which is a layer of protection compared to digital gold, which is unregulated.

4. Kho-Risk of Looking “Too Good to be True”

Investing apps marketed digital gold as cheap and easy gold investments because denominations could be bought for as little as ₹10 or ₹100. There is a high likelihood that investors were indifferent to the risks associated with the gold. Digital gold should come with risk warnings as it is marketed with the focus on convenience.

5. Digital Gold vs Gold Securities

Digital gold does not equate to regulated gold securities. You need to understand:

What you are purchasing (true physical gold vs an “account” amount).

If the seller is under any regulation.

What happens when a user defaults on a service or when a service goes insolvent?

Practical Investor Checklist Before Purchasing Digital Gold

Check the platform selling the digital gold: do they connect with SEBI registered entities or do they only provide a digital wallet?

Check the complete service use document: do you have the option for physical delivery of gold or is gold only a virtual balance?

Check the vaulting system or insurance cover audit reports, custodial audits, etc.

Ask about exit options: can you sell the digital gold or can it only be exchanged for gold in physical form?

Ensure the product is being offered via regulated channels.

Replace custodial gold with regulated alternatives (Gold ETFs, SGB) for greater safety in achieving your investing objectives.

(Sources: India Today, Live Mint).

 

 

Summary

SEBI on digital gold is communicating very clearly, there are no risk authorities regulating digital gold, and it is offered with high operational and counter-party risk. The option to buy small quantities of gold on your computer is highly tempting, but the risk is significant. The gold in your computer is also operational risk gold, and regulated gold securities come with highly differing regulatory risks.

For those looking into digital gold, keep in mind that it is an unregulated investment product and not a fully regulated one. Always ask, understand the risk, and regulated alternatives are better options if safety and transparency are priorities. In the world of investing, knowing “Is digital gold regulated in India?” is just as important as ‘How much should I invest?’.

 

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.