Here’s why you should not invest in digital gold

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Apps such as Paytm Money, Groww, Upstox, HDFC Securities and Motilal Oswal have a good reach. If they are distributing a product, their users take a note of it. No wonders the investment in digital gold, in a country that is fond of physical gold, has picked up. However, this is a space not well understood. The digital gold that you buy via these apps has to be backed by physical gold. In simpler terms, Paytm Money, Groww and other stock-broking firms must have the gold in the physical form whose digital form they are selling on their platform. Currently, no institution in India is verifying this. That said, the digital gold space is unregulated.

“Digital gold units are not issued by any regulated entity. There is no method to check whether the digital gold certificate is backed with the physical gold or not,” said Vijay Singhania, Chairman, TradeSmart.

Trouble in paradise

Markets regulator Sebi has taken a note of it, but only for Sebi-registered entities. It has prohibited stock-broking firms to sell this product. The National Stock Exchange has sent a circular in this regard to its members, which says that selling digital gold is in contravention of the Rule 8 (3) (f) of Securities Contracts (Regulation) Rules, 1957 (“SCRR”). It means digital gold does not come under the definition of securities as defined in this act.

“Sebi circular prohibits the dealing/offering digital gold selling via Sebi-registered entities, as it is not a security as mentioned in Securities Contracts (Regulation) Rules, 1957. The unregulated entities may continue selling digital gold, subject to RBI directions, if any,” said Singhania.

It means while stock brokers, which are regulated by Sebi, will have to stop selling digital gold, other distributors not regulated by Sebi such as wallets and investment platforms will continue doing so.

What should you do?

It is wise to stay away from unregulated products. Singhania cited the example of National Spot Exchange Ltd (promoted by FT &MCX). Many investors who were under the impression that the transactions are backed by the physical stocks were duped.

“Many of our clients insisted on trading in NSEL products at that particular time. Given that NSEL was giving a very lucrative return of 14-15% per annum, many people who were averse to investing in stocks, were rather more interested in NSEL.  However, we kept a cautious approach and restrained ourselves to opt for its membership,” said Singhania.

One never knows if digital gold is indeed backed by physical gold. If you do want to invest in digital gold, you may directly approach Augmont Gold; MMTC-PAMP India (a joint venture between state-run MMTC and Swiss firm MKS PAMP) and Digital Gold India.

Alternatively, you may go for sovereign gold bond or gold mutual funds.