What Is Digital Gold And Why Is SEBI Opposing It?

Digital gold has attracted hordes of young tech-savvy investors. However, the Securities and Exchange Board of India (SEBI) has begun cracking down on the asset class. SEBI has cracked down on crucial cogs of the digital gold market — trustees, brokers, exchanges, and investment advisers. Effectively, it has barred digital gold from being offered as a financial instrument in the public markets.

What Is Digital Gold?

An investor can buy, sell, or hold gold virtually without having to go through the hassles of separately renting a bank locker or physically storing it. The services to buy digital gold were initially offered by various digital gold companies, wallets, investment advisers, and brokers. Unlike buying physical gold from traditional jewellers while paying making charges and storage charges, investors can buy and sell digital gold at the touch of a button.

In addition to these advantages, customers can buy gold in multiples of a rupee, rather than in multiples of gram, making it suitable for people with small ticket sizes as well. Given India’s immense appetite for gold, the market for digital gold has grown rapidly, and commands around Rs 5,000 crore. Investors can accumulate gold by buying it in small quantities over time according to their capabilities, unlike the traditional methods which require a large expenditure at one go.

Why Is SEBI Cracking Down On Digital Gold?

According to SEBI, brokers and investment advisers are not authorised to deal in digital gold, and hence they cannot offer services to buy and sell gold.

However, since a centralised agency holds the gold, it is important for the issuer to have a strong financial profile. Further, there must be oversight over whether the transactions are truly backed by physical assets. In the past, the financial technologies-backed National Spot Exchange Limited saw investors being looted by being shown fake storage receipts. In simple language, the transactions were allegedly not backed by physical commodities, and the fraudsters ran off with investors’ money estimated at Rs 5,600 crore.

Further, without a system of strong checks and balances, there is no way for investors to ascertain whether they are receiving high-quality gold for the right price.

As a solution, in order to bring in more impartial third party oversight, digital gold companies had brought in debenture trustees. These trustees are responsible for protecting the rights of investors by maintaining an oversight over the systems, processes, and integrity of these companies.

But, SEBI has asked debenture trustees to move away from acting as trustees for digital gold. The market regulator has said that debenture trustees working with digital gold companies are not in accordance with the SEBI Act of 1992.

Without any oversights, the ecosystem could get treacherous for investors. In addition, SEBI has asked brokers, investment advisers, and exchanges to stop offering these products to investors. As a result, investors can buy these products only from other apps or directly from the providers. Since there are no regulations, investors lack a proper legal recourse.

In addition, the sector remains majorly unregulated with no rules about charges or the financial health of issuers. Virtually anyone can start offering digital gold services, and players even offer gold buybacks.

Currently, there are three major companies in the space — Augmont Gold, MMTC-PAMP and SafeGold. However, as new companies set up shop, regulations would be required for protection of investors and standardisation of products.

SEBI’s move could also be targeted at promoting regulated gold-linked assets such as sovereign gold bonds and gold ETFs, if one is looking at gold as an investment option. The Indian government introduced these bonds as a means to reduce the import bill on the gold. These bonds represent a specific number of grams of gold.

Further, investors are paid 2.5 per cent interest on buying these bonds — that is, investors are paid to hold gold. In addition, investors also receive a discount when buying such bond through online channels. The asset class is liquid, and investors can sell these bonds whenever required. Unlike physical or digital gold, there are no extra charges such as commissions and goods and services taxes.

However, investors cannot invest in multiples of a rupee and must buy in multiples of grams. The bond is a sovereign guarantee, and does not have gold backing it unlike, digital gold.

In a similar fashion, gold ETFs offer investors a chance to invest in gold, with expense ratios ranging from 0.5 per cent to 1 per cent.

So far, SEBI has focused solely on preventing problems and nudging investors away from the asset class rather than creating a constructive policy to help the sector grow while protecting investors.