Will digital gold shed some sheen under tighter regulation?

India, among the world’s largest consumers of gold — be it in the form of jewellery or coins bought as investments — has been quick to embrace digital gold, too. Digital gold, which offers an easy, no-touch way to buy and store gold safely, is particularly attractive because it lets one buy the yellow metal in very small denominations — one can even buy for ₹1. The tech-savvy population, and youngsters, have been among the biggest buyers of digital gold.

Yet, like other forms of emerging digital investment avenues such as cryptocurrencies, digital gold lies in a regulatory grey zone. Taking note, the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are reported to be framing fresh guidelines to bring digital gold, cryptos and other digital assets under their ambit.

While tighter regulation will make digital gold a safer investment option, industry players rue that the accompanying rules and regulations may make it less attractive to sellers and buyers. How the stakeholders arrive at a balance will decide how the segment moves forward.

What makes digital gold so attractive?

Consumers can buy digital gold from companies that offer them. Currently, Augmont Gold, MMTC-PAMP India and SafeGold (run by Digital Gold India) are the only companies in this segment in India.

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Buyers can procure gold from them via entities that offer the facility — GooglePay, Paytm, PhonePe, Motilal Oswal and HDFC Securities are just some examples. They can place the order and pay online, after which the selling entities procure the physical gold for the customer and store it in insured vaults. Customers can also seek physical delivery of the gold, which will be delivered to them at their doorstep in coins or bullion, at a fee.

Equally non-cumbersome is the selling process. Customers can use the same platform to sell their gold in any quantity, at any point of time. They can also use the digital gold as collateral when then take online loans. Plus, the gold comes with high levels of purity.

Now come the disadvantages. For one, there is a ₹2 lakh limit on most investment platforms; this means one cannot make a substantial investment in this asset. For another, there are sizeable charges applied on delivery, etc.

More critical, however, is the lack of regulations in India. It is to address this issue that the RBI and SEBI are at the drawing board with plans for tighter norms.

The physical gold industry is also worried. The India Bullion & Jewellers Association (IBJA) has reportedly appealed to SEBI, asking it to regulate digital gold. The IBJA pointed to concerns on the storage of physical gold against digital purchases. There is a fear that all the gold purchased digitally may not be stored in vaults.

What RBI and SEBI may propose

While SEBI and the RBI are yet undecided on who gets control over cryptocurrencies, there is little doubt that digital gold will be governed by the markets regulator.

The first salvos have already been fired. On October 21, SEBI issued a circular barring registered investment advisers (RIAs) from undertaking ‘unregulated activities’. This would include operating platforms where users can buy and sell digital gold. Some financial-technology (fintech) firms have begun to close down digital gold operations following the circular, it was reported.

In the absence of legislation that directly deals with digital gold, what SEBI has been trying to do is introduce checks and balances at critical junctures. It has issues norms that apply to various entities on the digital gold supply chain, such as brokers, fintech platforms, trustees and investment advisers. This makes it infinitely more difficult — though safer — for the lay investor to buy gold online.

Government action

The Centre, meanwhile, is looking at amending the SEBI Act and the Securities Contracts Regulation Act such that digital gold gets categorised as a security. This would bring it directly under the ambit of SEBI, said media reports.

The Centre may also look at establishing regulated gold exchanges which would, again, come under SEBI’s radar.