Digital Gold – Why is the Glitter less?

Gold has always been considered one of the most precious metals in the world and also an attractive investment over time. Digital gold, the digital equivalent of the metal, has been attracting increasing investment over the past few years, especially from younger, tech-savvy investors who value instant execution, low storage costs, and the ability to buy small quantities through mobile apps.

However, observing that some online platforms have been promoting ‘digital gold’ or ‘e-gold’ products as an easy alternative to investing in physical gold, SEBI recently issued a circular cautioning that such products differ from SEBI-regulated gold products.

This means that they are neither notified as securities nor regulated as commodity derivatives in India, and therefore, investor protection mechanisms applicable to regulated securities (such as Gold Exchange Traded Funds (ETFs) , gold funds offered by mutual funds, exchange-traded commodity derivative contracts, and Electronic Gold Receipts tradable on stock exchanges) would not extend to unregulated digital gold schemes.

To understand the whole matter, let us take a deep dive into what digital gold is, its benefits, and the issues related to it.

What is Digital Gold?

Digital gold refers to the modern way of investing in gold without physically owning it. Through Blockchain technology that generates digital gold, individuals can buy, sell, and store gold securely in digital form. You can invest as little as Rs1 or Rs 10, making it accessible to most people. Transactions are based on real-time market prices, and the ownership is recorded digitally in your account. The physical gold backing your digital purchase is reportedly stored in audited, high-security vaults.

When you want to sell, you can do so instantly on the same platform at the current market price. The funds are typically credited to your bank account within a few business days. You may also have the option to receive your accumulated digital gold delivered to your doorstep as physical coins or bars (subject to a minimum weight requirement and delivery fees). Some platforms also allow you to exchange your digital gold for jewelry at partner stores.

Different ways of investing in Digital Gold

Digital gold offers great flexibility and convenience for investment through various platforms.

1. Digital gold platforms:Various online platforms allow one to buy, sell, and hold digital gold through a user-friendly interface. Trading is typically 24/7.
2. Gold ETF: Gold ETFs (Exchange Traded Funds) offer exposure to gold without the investor physically holding the gold. One can buy gold ETFs through the stock exchange.
3. Gold-linked Bonds: These financial products link their returns to the price of gold and provide a fixed income with the potential for significant returns.
4. Mobile apps:Various dedicated mobile apps, such as Phonepe, Gpay, etc, offer easy access to digital gold.
5. Gold digital certificates:These certificates indicate ownership of a particular amount of gold stored in the secured vaults and are issued by financial institutions.

Taxation on Digital Gold

Digital gold is subject to capital gains tax on sale. Investments held for up to 2 years are considered short-term and are taxed as per the investor’s tax slab on redemption. If the investment is held for more than 2 years, long-term capital gains are taxed at 12.5%.

Additionally, the purchase of digital gold is the same as buying physical gold and is subject to a 3% GST.

Regulatory framework in Different Countries – Currently there are no regulations in the digital gold market in India which exposes the investor to counterparty risk. Similar to India, many countries do not yet have a specific comprehensive regulatory framework for digital assets which it is still developing.

• United States:No national unified regulatory framework exists specifically for retail digital gold platforms, but providers must adhere to general financial regulations. Regulation falls under the purview of multiple federal and state agencies, including the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
• European Union (EU): The EU’s comprehensive Markets in Crypto Assets (MiCA) regulation is a significant step towards regulating digital assets. This framework aims to provide legal certainty and investor protection across member states.
• UK : The Financial Conduct Authority (FCA) is the primary financial regulator here. Its initial control over digital/crypto-assets was limited to Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) requirements. However, new legislation is being introduced to bring a wider range of crypto-asset activities into the regulatory perimeter.

Benefits of Digital Gold

Investing in digital gold offers many benefits, including –

• No physical storage hassles – relieving investors from the fear of theft or accidental loss that comes with storing physical gold.
•  Guaranteed metal purity – In the case of physical gold, it is crucial that one buy hallmarked egold, or else one may get duped into purchasing counterfeit/lower quality. Typically, digital gold is sold at 99.99% purity, and since it’s held in digital form, the risk of lower quality is low.
• Available at low amounts – We are all aware that physical gold is anything but cheap. However, one can purchase digital gold for an amount as low as Rs 1 i.e in fractions.
• Easy liquidity – Gold is already considered a highly liquid asset class and digital gold is even better. One can sell the digital gold available in one’s online account, and the payment will be directly credited to one’s bank account.

Disadvantages of Digital Gold

No Physical Access to Own Gold: Even though one’s investment is backed by real gold, we do not physically hold it, which might be a concern for some investors who prefer tangible assets. Although some platforms offer an option to do so , minimum amounts & delivery charges may apply.

Price Volatility: Like physical gold, digital gold is not immune to price fluctuations. Gold prices can be highly volatile, influenced by global economic factors and market trends, leading to investor losses.

Regulatory risks: Currently, there are no regulations in India’s digital gold market that expose investors to counterparty risk. That is, if the platform fails to comply with its contract, you have no regulatory recourse. SEBI is not protecting your rights or overseeing them. If the company fails, then you will have to go to the regular judicial system, where your private contract can be enforced. You will be treated like any other creditor having claim on the company’s asset.

So is investing in Digital gold a good idea?

• Before investing in digital gold, it is crucial to research the specific platform and its credentials to assess the exact nature of the risk. Investors should look for platforms that partner with accredited gold providers and use transparent, independently verified custodians for storage.
• Although buying digital gold is very convenient, till regulations change, consider regulated alternatives like gold ETFs offered in stock exchanges and Gold MFs.

Digital gold companies have been innovative, tapping into unmet consumer demand for gold. SEBI, through its circular, has raised awareness that buyers are on their own and should perform due diligence regarding the legitimacy of the platform and their charges. Reports suggest that these companies are willing to be regulated by SEBI and have approached it. If that happens, it will be a win-win situation for everyone.