SEBI flags regulatory gaps, cautions investors on digital gold and e-gold products

The Securities and Exchange Board of India (SEBI) has issued a strong advisory to investors cautioning them against the growing trend of purchasing “digital gold” or e-gold products from online platforms. The regulator said these products are being widely promoted as easy, low-ticket investment options but operate entirely outside the country’s securities regulatory framework, exposing buyers to significant risks.

"It has come to the notice of SEBI that some digital/online platforms are offering investors to invest in ‘Digital Gold/E-Gold Products’. Digital Gold is being marketed as an alternative for investment in physical gold," the market regulator said in a statement.

SEBI has stated that numerous digital platforms, fintech applications, and gold merchants are promoting digital gold as an easy replacement for physical gold. These platforms permit the users to commence investments with minimal amounts, which are usually Rs 10 or Rs 100.

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Most of them point out the advantages, like buying or selling units at any moment, getting cash instantly, and the possibility of exchanging the digital gold for gold ornaments. The consumer interest has been rising due to these marketing strategies, particularly among young and novice investors.

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Digital gold outside regulatory oversight

SEBI clarified that digital gold products offered by such platforms are not notified as securities, nor are they recognised under the commodity derivatives framework. As a result, they fall completely outside SEBI’s jurisdiction.

According to the regulator, this absence of control allows the investors to be exposed to the risk of the counterparties failing, where the platform or vendor might go bankrupt and also the operations risk that could be the smaller issues related to storage, purity, delivery, platform integrity, and settlement.

The SEBI also pointed out that the entire spectrum of investor protection measures available under the prescribed securities laws is not applicable to the digital gold bought through these channels. Thus, the investors cannot depend upon the grievance redressal mechanisms, intermediate supervision, or systemic safeguards that are there for the regulated financial instruments.

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SEBI advises investors to opt for regulated gold investment routes

In order to guarantee security and transparency, SEBI has recommended that investors take the regulated route for gold investment. The investments include exchange-traded commodity derivatives, gold-exchange-traded funds that are issued by mutual funds, and electronic gold receipts that are traded on stock exchanges. All these investments are carried out through the intermediaries who are registered with the SEBI and are subject to strict regulatory guidelines concerning settlement, disclosure, and investor protection.

The regulator's advice has come at a time when the investor's interest in gold-related products is increasing. World Gold Council (WGC) data shows that in October gold exchange-traded funds of India had net inflows of $850 million, which resulted in the total inflows for the year reaching an unprecedented $3.05 billion. This is the highest annual inflow ever recorded, indicating an increasing demand for regulated gold investment instruments during the time of global economic uncertainty.