Investing Safely in Digital Gold Products
Investing in digital gold products is becoming increasingly popular, but the Securities and Exchange Board of India (SEBI) has issued a strong warning regarding such investments. The market regulator has cautioned investors against participating in digital gold offerings from unregulated platforms, clarifying that these products fall outside its regulatory framework. SEBI highlighted that numerous fintech companies and apps are marketing digital gold without proper supervision, which exposes investors to various operational and counterparty risks.
Understanding Digital Gold Risks
Digital gold differs significantly from regulated investment products like gold exchange-traded funds (ETFs) and electronic gold receipts, both of which enjoy investor protection under the existing financial laws. Because digital gold is neither categorised as a security nor as a commodity derivative, investors miss out on the safety features typically offered in capital markets.
Popularity of Digital Gold Platforms
This warning comes at a time when digital gold is gaining traction among retail investors through various platforms, including SafeGold, Paytm, Google Pay, Jar, Gullak, IndiaGold, and PhonePe. These applications permit users to purchase small amounts of gold easily, but experts caution that these offerings often exist in a legally ambiguous space that mingles physical and financial assets.
Expert Commentary on Digital Gold
Deepak Abbot, co-founder of IndiaGold, stated that the company’s main emphasis lies with gold monetisation rather than digital gold offerings. He pointed out that digital gold currently represents less than 1% of their business. Abbot noted that SEBI’s clarification indicates that they do not regulate digital gold, which implies a lack of consumer protection in the event of platform failures.
Industry Perspectives on SEBI’s Advisory
An industry expert, who chose to remain anonymous, expressed that many well-established players view SEBI’s circular positively. The advisory mainly targets those companies that neglect to audit or insure their physical gold holdings, while larger players are already adhering to regulations. The industry association is also engaged in discussions with SEBI, indicating movement towards improvement.
SEBI’s Balanced Approach
This expert mentioned that SEBI’s current tone appears more measured compared to the 2021 directives, where certain companies were instructed to cease their digital gold sales. Instead, the focus now is on informing the public that these products lack investor protection.
Implications for Indian Consumers
The digital gold landscape has evolved, with participation from government-backed entities like MMTC and major financial institutions. Startup Superb has reached out to PhonePe, Jar, Paytm, and Gullak for further insights.
Several companies that expanded their offerings to include digital gold may have done so in a competitive push to showcase higher transaction values, particularly in light of rising gold prices. Unfortunately, this eagerness to attract deal-hungry consumers poses a risk of exploitation by dishonest operators. Instances have emerged where Indian consumers trading gold amid price increases have faced discrepancies in purity, particularly with jewellery offered for exchanges. Jewellers report instances where gold jewellery labelled as 22 carat has tested as low as 15-16 carat, shocking consumers.
Reliability of Digital Gold Platforms
Digital gold aims to resolve such purity issues when gold is perceived as an investment; however, the reliance on the credibility of the platform is even greater than with traditional jewellers, given the absence of any physical gold to inspect. Buyers are thus advised to exercise utmost caution.
