Clear regulations: On digital gold

Synopsis: Address regulatory gaps for digital gold.

What is the issue?

Recently, the Securities and Exchange Board of India (SEBI) issued an advisory, forbidding registered investment advisers from engaging in unregulated activities such as providing platforms for dealing in unregulated products, or otherwise facilitating such trades.

While assets like cryptocurrencies and non-fungible token (NFT) do fall in this category, the regulator specifically mentioned digital gold.

What is Digital Gold?

Digital gold consists of digital certificates issued against holdings of the physical metal. These assets can be traded digitally or redeemed in metal, as the holder chooses.

These are similar to gold exchange-traded funds (ETFs) and the government’s own sovereign gold bonds. But unlike sovereign bonds, private digital gold certificates and gold ETFs are not interest-bearing.

Households that are interested in precious metal holdings can accumulate digital gold in small quantities transparently instead of buying and holding the metal itself. Households that wish to liquidate gold holdings can also do so via this route.

Why SEBI should reconsider its decision on digital gold?

Firstly, unlike cryptocurrencies and NFTs, digital gold consists of assets backed by the physical metal.

Secondly, the players in this market are all well-known, organised entities, including government-owned entities.

Thirdly, there’s always greater activity in this segment at the festive season and instead of discouraging such trades, the regulator should consider letting them continue until such time as gold exchanges are established.

What are the concerns related to Digital gold?

Digital gold falls in a regulatory grey zone in certain key respects at the moment. The instrument itself does not come directly under the purview of any financial sector regulator, and it is not currently traded on recognised financial exchanges.

What is the way forward?

In August 2021, SEBI flagged deals in digital gold as a breach of the Securities Contracts (Regulation) Rules (SCRR), 1957.

In response to that ruling by the regulator, the National Stock Exchange instructed its members, including stockbrokers and wealth managers, to wind down trades in digital gold by September 10. This has led to an artificial thinning out of the market during the festive season, when demand is high.

Instead of this, the regulator should be looking to remove the grey areas, and to accelerate the transition to setting up full-fledged gold exchanges.

Sebi’s proposed framework for new gold exchanges will certainly help bring more clarity and transparency, once such exchanges are Set up.

Until such time however, the regulator should not discourage known entities from offering this instrument.

Source: This post is based on the article “Clear regulations” published in “Business Standard” on 26th Oct 2021.