SEBI’s BIG Warning On Digital Gold: ‘They Operate…’; Why Investors Should Worry? How It Differs From ETFs, MF?

The massive fluctuations on gold prices over the past few months has led multiple companies to bring their own digital gold investment options, as an alternative to physical gold purchase. But digital gold products may entail significant risks for investors including counterparty and operational risks, warned the Securities and Exchange Board of India on Saturday.

SEBI has enabled investments in gold and gold-linked investment instruments through various products like exchange traded funds, gold mutual funds, electronic gold receipts (EGRs), etc. But digital gold investment products operate outside SEBi's purview, stated the market watchdog in its press release on Saturday.

SEBI's Warning On Digital Gold

SEBI has warned investors that as digital gold "operate entirely outside its purview", investors can not get the benefit of protection mechanism set by the body for other gold investment products like ETFs, EGR, etc.

"It is informed that such digital gold products are different from SEBI
regulated gold products as they are neither notified as securities nor regulated as
commodity derivatives. They operate entirely outside the purview of SEBI. Such digital
gold products may entail significant risks for investors and may expose investors to
counterparty and operational risks," stated SEBI.

What is Digital Gold?

Digital gold is a way to invest in gold through online platforms. Several firms have launched their own digital gold investment scheme where people can start investing with Rs 10 and redeem at any time to purchase physical gold.

How Digital Gold is Different From ETF, Mutual Funds, EGRs, etc?

Sebi-regulated options like Gold Exchange Traded Funds (ETFs) offered by mutual funds, exchange-traded commodity derivative contracts, and Electronic Gold Receipts available on stock exchanges.

According to Sebi, digital gold products differ from those regulated by the board. They are neither classified as securities nor regulated as commodity derivatives, thus operating outside Sebi's jurisdiction. The regulator highlighted that these unregulated products might expose investors to substantial counterparty and operational risks.

"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."

Investors can not resolve any issue or dispute related to digital gold investment using SEBI's protectionary guidelines or measures. "Investors / participants are made aware that none of the investor protection mechanisms under securities market purview shall be available for investments in such Digital Gold/ E- Gold products," the press release added. While digital gold may seem appealing due to its convenience, it lacks the regulatory oversight provided by Sebi.