Why Is SEBI Favouring Gold ETFs Over Digital Gold?—Explained

The Securities Exchange Board Of India (SEBI) has cautioned investors against unregulated instruments such as digital gold amid the recent surge in prices of the yellow metal.

Investors who are interested in gold and related products should consider options such as physical gold or Gold Exchange Traded Funds (ETFs) or Exchange Traded Commodity Derivative Contracts, the market regulator advised in a circular last week.

According to SEBI, gold ETFs could be a safer instrument as they come under the regulatory framework to protect investors’ interest. In contrast, people who are eyeing digital gold as an investment option should take into account several risk factors.

The market regulator cautioned investors against “Digital Gold” or “E-Gold” products as these investment instruments, offered by various online platforms, are not regulated by SEBI and can turn out to be risky.  

“It has come to the notice of SEBI that 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,” the regulator said in its advisory dated Nov. 8.

SEBI advised investors to exercise caution and avoid unregulated digital gold schemes that fall outside the regulatory framework for investor protection.

“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,” it said.

According to SEBI, the products controlled by it are governed by established regulatory frameworks. These instruments can be accessed only through SEBI-registered intermediaries. One such product is gold ETFs, which allow investors to buy units representing physical gold stored in secure vaults. ''Many prominent fund houses have their gold ETFs, which can be accessed on any trading platforms.''

They are safer for investors as Gold-ETFs offer a regulated and transparent way to invest in the yellow metal compared to unregulated digital gold platforms. As clarified by SEBI, Gold ETFs are listed on recognised stock exchanges, ensuring proper pricing, liquidity and investor protection. 

However, products like digital gold fall outside SEBI’s regulatory control and investor protection framework. “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,” it said.

“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,” the regulator further warned.

In case of fraud or default in gold ETFs, SEBI is mandated with ensuring the safety of investors’ money under strict regulatory norms. These regulations do not apply to digital gold investments, which are popularised by fintech apps or many jewellery brands. As a result, if an investor is duped or faces fraud, default, or loss in the investments made in digital gold, SEBI will not be able to help in such circumstances.

The market regulator’s warning comes amid a rising preference for gold among investors after the recent surge in price of the yellow metal. Due to geopolitical tensions and economic uncertainty, gold has delivered nearly 60% returns in the last one year. This is pushing investors to bet on gold products.

On Nov. 10, 24K gold price stood at Rs 12,201 per gram, while 22K gold traded at Rs 11,184 per gram in India, according to Goodreturns. This comes after gold reached an all-time high of Rs 13,277 per gram for 24K on Oct. 17. Since that peak, the price of the yellow metal has eased marginally due to a stronger dollar, less likelihood of a potential US Fed rate cut in December and softening of US-China trade tensions, among other factors.