Digital gold is an avant-garde and contemporary method for buying, selling, and accumulating gold electronically, starting with investments as low as one rupee. It gives the holder the ownership right to a certain amount of physical gold, usually of 24-karat purity, which is kept in secure and insured vaults by the platform provider. Using this technique completely eradicates the inconveniences linked with owning physical gold, i.e., storage fees, safety issues, and the necessity of purity certification.
Its availability through widely used mobile applications and online platforms has turned it into a favorite, especially amongst the younger generation and novice investors, as it presents a straightforward and instant way to diversify a portfolio with a traditional inflation hedge. Nonetheless, this convenience does not imply a regulatory safety net.
Unregulated Product Framework
The fundamental reason for the Securities and Exchange Board of India (SEBI) to take a precautionary position is that the digital gold offers in the industry mostly reside in the uncontrolled territory.
Unlike investments in Gold Exchange Traded Funds (ETFs), Sovereign Gold Bonds (SGBs), or Electronic Gold Receipts (EGRs), gold in digital form from various online sources is not acknowledged as a security nor does it get treated as a commodity derivative subject to regulation.
The absence of formal regulatory supervision is the crucial aspect that is missing. In the absence of SEBI’s direct control, these products are not able to use the rigorous checks and balances that are set up to safeguard investors in the capital market.
Absence of Investor Protection
The primary risk that SEBI pointed out was the lack of protective measures for investors. If a platform goes bankrupt or if there is a case of fraud or a technical error, investors in unregulated digital gold might not get any help from the investor protection schemes that are in place for the securities market.
More specifically, the following are of concern: Counterparty Risk (which is the risk that the gold storage platform might either go bankrupt or not deliver), and Operational Risk (risks associated with the storage, insurance, or just the unregulated entity’s business continuity).
SEBI’s advisory is nothing but a clear instruction: if one wants regulated and safe exposure to gold, then one should go for Gold ETFs or EGRs that are traded on exchanges through authorized intermediaries.
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A recent media graduate, Bhumi Vashisht is currently making a significant contribution as a committed content writer. She brings new ideas to the media sector and is an expert at creating strategic content and captivating tales, having working in the field from past four months.
