SEBI Warns Against Digital Gold Risks

Brief Context

Context The Securities and Exchange Board of India (SEBI) has cautioned the general public against investing in digital gold and e-gold products. About The investment in digital gold has existed for several years, but there has been a surge in their popularity over the last one year. The reasons include a steep rise in gold prices, combined with the convenience, and ease of owning gold digitally through online platforms.

Source Content

Syllabus: GS3/Economy

Context

• The Securities and Exchange Board of India (SEBI) has cautioned the general public against investing in digital gold and e-gold products.

About

• The investment in digital gold has existed for several years, but there has been a surge in their popularity over the last one year.
  • The reasons include a steep rise in gold prices, combined with the convenience, and ease of owning gold digitally through online platforms. 
• The digital gold products 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.
• Tax: In India, buying gold, whether physical or digital, usually attracts GST, though the exact rate for digital gold can vary depending on how the provider structures the product.
  • When you sell digital gold, any profit is treated as a capital gain, and the tax rate depends on how long you have held it.

Pros of Investing in Digital Gold: 

• Digital gold is easy to access and allows one to sell it quickly in case of an emergency. 
• Unlike traditional gold purchases, digital gold  allows investors to start investing 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 as it can be converted into coins, bars, or jewellery.
• Investing in digital gold does not require a demat account or margin deposits, making it a more convenient option.

Concerns Related Investing In Digital Gold

• Not regulated by SEBI or RBI.
• No guaranteed investor protection.
• Depends entirely on the company’s honesty and stability.
• Possible hidden fees (delivery, storage, or making charges).
• Limited legal recourse if something goes wrong.

Why SEBI Has Cautioned Investors?

• It has observed that several digital and online platforms are offering investors the facility to invest in digital gold or e-gold products.
  • Many jewellers from both the organised and unorganised sectors are providing opportunities for investment in digital gold.
• These products are neither notified as securities nor regulated as commodity derivatives.
• These gold products may entail significant risks for investors and may expose investors to counterparty and operational risks.

Recommendations of SEBI

• Investors should look at investing in gold products which are regulated by the Sebi to avoid any kind of risk.
• Various Sebi-regulated gold products are: SEBI advises investors to use regulated gold investment options such as Sovereign Gold Bonds (SGBs), Gold exchange-traded fund (ETF), Electronic Gold Receipts (EGRs), and commodity derivatives.
  • Investments in these products can be made through Sebi-registered intermediaries and are governed by the regulatory framework prescribed by the markets regulator.

Source: IE