SEBI Cautions Public About Dealing In ‘Digital Gold

On Nov 8, SEBI issued a cautionary notice to investors dealing in “Digital Gold” or “E-Gold” through a circular. The securities markets regulator has clearly stated that it does not regulate the “Digital Gold/E-Gold” products. Digital gold does not mean gold ETFs or gold mutual funds which are regulated and safe to invest in.

This warning is drawing a clear line in the sand. Numerous Fintech apps and trusted jewellery brands have been promoting digital gold as a seamless way to invest. However, now, SEBI has stated that these instruments are operating entirely outside its purview. Does this mean that investors are exposed to a risk without any of the standard market protections? This advisory forces another important question for the investors. If these popular products are unregulated by the market, what exactly are investors buying, and what are the real risks?

What Is The Core Problem With Digital Gold?

The regulator's issue is not with the gold itself. Instead, it is with the financial product wrapper the ‘Digital gold/E-Gold’ products are sold in. SEBI’s warning has clarified that the digital gold being sold online is neither notified as "securities" nor regulated as "commodity derivatives".

In contrast, SEBI has also clearly defined and regulated the ecosystem for gold-based investments.

• Gold ETFs (Exchange Traded Funds) that are offered by mutual funds.
• EGRs (Electronic Gold Receipts) that trade on stock exchanges.
• Exchange-Traded Commodity Derivative Contracts (i.e., gold futures)

The circular states that only these products are regulated and a strict regulatory framework governs them. They must be sold through SEBI-registered intermediaries (like brokers or mutual fund distributors).

Fintech platforms and jewellers often sell “Digital Gold/E-Gold” products. However, these providers exist in a regulatory void outside this framework. SEBI's circular has highlighted that the trust exhibited by these brands is purely brand-based, not regulator-backed. This distinction is important. But why is SEBI stepping in to highlight this now?

Why Has SEBI Issued This Cautionary Warning?

SEBI's "mechanism" for this warning is its core mandate of investor protection. The regulator has stepped in because it "has come to the notice of SEBI" that these unregulated products are being aggressively marketed as an "alternative for investment in physical gold."

The regulator is specifically warning that this lack of oversight is exposing investors to two major risks:

1. Counterparty Risk - When you buy a Gold ETF unit, the gold is held in a trust by an independent custodian, legally separate from the mutual fund company. So if the fund house (the counterparty) went bankrupt, your gold would be safe. However, with unregulated digital gold, what would happen if the platform or its third-party vault provider fails? Investors may have "limited recourse" and could be treated as unsecured creditors, fighting to recover their money or gold.

2. Operational Risk - This risk can cover everything from platform glitches and hacks to disputes over the gold purity and weight. In the regulated market, exchanges and depositories have robust, audited systems to take care of these. In the unregulated space, the investors entirely rely on the platform's private technology and internal audits.

SEBI’s warning is a clear attempt to force investors to ask these hard questions. This leads to the most important point: if something goes wrong, what specific protections are investors missing?

The Missing Investor Protection

This is the real-world consequence of operating "outside the purview of SEBI".

The regulator's circular has explicitly stated that "none of the investor protection mechanisms under securities market purview shall be available".

For an investor, this means that they will have no access to these critical safety nets built into the official financial market.

• SEBI SCORES Platform - The SEBI Complaints Redressal System (SCORES) is a powerful, centralised platform where investors can file complaints against listed companies or registered intermediaries.

• Stock Exchange IPF (Investor Protection Fund) - The stock exchanges (such as the NSE and BSE) maintain a dedicated fund to compensate investors in the event that a stockbroker defaults or fails to honour their obligations.

• Registered Intermediary Oversight - SEBI-registered brokers and mutual funds are bound by strict rules and regulations on capital adequacy, professional conduct, segregation of client assets, and regular audits.

In conclusion, SEBI's advisory is a powerful "buyer beware" notice, serving as a timely reminder for the millions of retail investors who buy gold with a single tap on an app.

Source

SEBI Official