Digital gold refers to buying gold without physically possessing the precious metal. The price of digital gold is linked to that of physical gold.
The Securities and Exchange Board of India (Sebi) has cautioned the general public against investing in digital gold and e-gold products. While these investment avenues have existed for several years, a steep rise in gold prices, combined with the convenience, and ease of owning gold digitally through online platforms, have led to a surge in their popularity over the last one year. The regulator said digital gold products are often promoted as investment alternatives to physical gold. However, they remain unregulated and do not fall under any regulatory ambit, exposing investors to heightened risks.
What is digital gold?
Digital gold refers to buying gold without physically possessing the precious metal. The price of digital gold is linked to that of physical gold. Digital gold is created using blockchain technology. It allows investors to buy, sell and store gold electronically.
Digital gold is easy to access and allows one to sell it quickly in case of an emergency. Unlike traditional gold purchases which require large investments, digital gold or e-gold products allow investors to start owning the precious metal with smaller amounts. It also eliminates the storage hassle, which is the biggest challenge associated with physical gold. Digital gold allows investors to convert their investment into physical gold whenever required. It can be converted into coins, bars, or jewellery.
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A significant rise in gold prices over the last one year has drawn investors toward digital gold. MCX spot gold prices have climbed 59 per cent in the last one year from Rs 76,577 per 10 gm to Rs 1.22 lakh per 10 gm in the past one year.
Why has Sebi cautioned investors on digital gold?
The markets regulator said it has observed that several digital and online platforms are offering investors the facility to invest in digital gold or e-gold products. These offerings are often marketed as convenient and alternatives to holding physical gold.
Sebi said digital gold products are different from gold-related products regulated by it. These products are neither notified as securities nor regulated as commodity derivatives.
Why are digital gold products considered risky?
According to the Sebi, digital gold operates entirely outside the regulatory purview. These gold products may entail significant risks for investors and may expose investors to counterparty and operational risks, it said.
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“None of the investor protection mechanisms under securities market purview shall be available for investments in such digital gold/ e-gold products,” Sebi said.
Unlike gold ETF and commodity derivatives, investing in digital gold does not require a demat account or margin deposits, making it a more convenient option and driving higher investor interest.
Many jewellers from both the organised and unorganised sectors are providing opportunities for investment in digital gold.
“Digital gold is like an over-the-counter exchange-traded fund (ETF) product. This product runs counterparty risk and so there is always a risk of default. This is the biggest worry for the Sebi,” said a market expert.
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Social media has also contributed to the rising popularity of digital gold as an attractive investment option, experts said.
What should investors do?
Experts said investors should look at investing in gold products which are regulated by the Sebi to avoid any kind of risk.
The markets regulator has enabled investments in gold and gold related instruments through various Sebi-regulated gold products such as exchange traded commodity derivative contracts, gold ETFs offered by mutual funds and electronic gold receipts (EGRs) tradeable on stock exchanges. Investments in these products can be made through Sebi-registered intermediaries and are governed by the regulatory framework prescribed by the markets regulator.
“Investors are encouraged to opt for Sebi-regulated avenues such as Gold ETFs, Sovereign Gold Bonds (SGBs), or commodity derivatives traded on MCX and NSE to mitigate counterparty and operational risks,” said Anindya Banerjee, head commodity and currency, Kotak Securities.
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Commodity derivatives traded on regulated exchanges such as MCX and NSE are governed by stringent risk management systems, margin frameworks, and daily mark-to-market settlements. All trades are guaranteed through a clearing corporation, eliminating default risk from counterparties. Transparent price discovery and robust regulatory oversight by Sebi further enhance market integrity, making these instruments a safer and more efficient alternative for investors seeking exposure to commodities, he said.
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