Digi to dizzy highs: Digital gold shines in regulatory dark spot

– Vinod Kothari & Dayita Kanodia | finserv@vinodkothari.com

An industry report on a digital gold seller website estimates the FY 25 digital gold volume of 25 tons, which is a whopping Rs 30 lakh crores. While that number may be mind-boggling and may be inclusive of other forms of electronic gold (gold ETFs for example), there is no doubt that digital gold, sold on platforms from Paytm to Google Pay, to a wide variety of electronic platforms, has attracted the fancy of crores of investors. Turnover reported on the financials of some of the digital gold sellers^[1] is almost 90% in FY 24-25. Looking at these volumes, one may ask – What exactly are the consumers actually buying and who is accountable for all these investments if anything goes wrong?

In this article the author discusses the current regulatory void in which digital gold is surging, and why it is so surprising that SEBI has acquired powers to regulate commodity exchanges, while a regulated digital gold scheme called Electronic Gold Receipts (EGRs) has already been launched under the aegis of that regulatory power.

The golden shine

The love that Indians have for gold doesn’t need elaboration; India is the world’s largest household gold holding country. The Morgan Stanley report that the stock of gold with Indian households may be Rs 336 lakh crores was cited all over. At the same time, the prices of gold have continued to surge.

With gold becoming increasingly unaffordable for a large section of the Indian population, many have turned to digital gold, a concept that allows individuals to invest with amounts as low as ₹100 and own a fraction of the “gold commodity.”

The three major platforms offering digital gold let you buy gold with Re 1, Rs 10 and Rs 100 – whatever infinitesimals fractions of the virtual yellow metal that you want to buy, and these sales have reached dizzy heights. One such digital gold seller reported a FY 24-25 sale of Rs 66230 crores, registering an increase of 89% over the previous year.

Current Regulatory Vacuum: 

The typical search for law about any new instrument would be – which of the existing laws cover a new-age instrument called digital gold? It would be counter-intuitive to expect that laws would always house the provisions for transactions that evolve in a dynamic world. Laws evolve much slower than situations, transactions, dealings, interests or the way people perceive or deal in value or wealth.

However, some of the potential laws would be – is it a “security” under the Securities Contracts Regulation Act? Is it a “deposit” being a financial transaction, and may come under the bar of the Banning of Unregulated Deposit Schemes Act? Given the fact that digital gold is backed, at least supposedly, by a physical gold, is it similar to trading in warehousing receipts under the Warehousing Development and Regulation Act? And so on.

The easiest to dismiss will be the Warehousing law, which was obviously intended for warehouse keeping and transferability of warehousing receipts. It was mostly intended for agricultural commodities. Some metals have also been notified by the WDRA, but gold is not one of them, and for very understandable reasons.

The content about transactions in digital gold being deposit transactions also seems easy to dismiss, at least theoretically, as the intent of a digital gold seller is not to receive money with a promise to return it. In fact, there is nothing to return, as the money has been exchanged for a right over an infinitesimal portion of gold. The digital gold seller makes a purported sale; a sale is not a deposit. The one who sells digital gold is actually selling the gold backing it. But that itself may be fallacy, because a sale requires appropriation and ascertainment of the goods, and given that the transactions in digital gold are for sizes as small as Rs 100, it is unlikely that physical gold of as much quantum would have been separated. So, if it is not appropriation or segregation of the underlying goods, then it may very well be construed as a receipt of money without the transfer of goods, and hence, deposit regulations may be brought in.

Clearly, digital gold is being traded as an investment product, and not as a device to actually take take or give delivery of the gold. Therefore, instinctively, the focus should be on the Securities Contracts (Regulation) Act (SCRA). It is bought and sold in fixed denominations of money; therefore, it also has the optical similarity with a typical financial instrument. If one sees the definition of “securities” under the SCRA, it is an inclusive definition – meaning thereby that the law does not define what a security is, but lists out what securities are covered by the law. Two points – that list itself has continued to expand over time, either because of statutory enlistment of new items, or because of the power granted to Central Govt under sec. 2 (1) (h) (iia).

In 2015, powers to regulate commodity exchanges and commodity derivative transactions were conferred on SEBI, by amending the SCRA. SEBI itself has framed a scheme for Electronic Gold Receipts, discussed below. Hence, dealing with digital gold is not alien to SEBI’s domain. In any case, the Central Govt has the power to notify digital gold as a security.

On 8th Nov., 2025, SEBI issued a press release, less than even the old text form statutory warning cigarette packets, saying that digital gold is unregulated, and investors need to be aware that investor protection mechanisms under securities market purview shall not be available for such digital gold investments. However, what is the reason for the regulators waiting and watching a ballooning market, without a definitive regulatory clarity?

This unregulated nature of digital gold was also highlighted in the case of Nishchay Babu Arkalgud vs Jar Gold Retail Private Limited, wherein the Karnataka High Court observed:

The evolution of digital gold, as a commercial concept, is not in dispute. However, the materials on record disclose that serious allegations are surfaced, including assertions that physical gold could not be traced when demanded, notwithstanding the assurances to the contrary.

Further, several customer complaints about dealings by the digital gold platform were noted as a part of the judgment, such as:

“This app has absolutely no credibility, you keep getting prompts that you’ve saved enough money to buy a gold coin, but every time just before placing order for gold coin, you get a message that gold coin is not deliverable. Also you can’t withdraw the amount you’ve saved, it only allows to withdrawal almost half of the amount. I mean, what even is the point of this application, why wouldn’t anyone just use a savings account? Lost case.”

Such comments are largely because of the unregulated nature of the product.

SEBI imposed ban for stock brokers

Earlier, digital gold was offered not only through digital payment applications but also by stock brokers registered with SEBI. However, under Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), members of a stock exchange are prohibited from engaging in any business other than that of securities or commodity derivatives, except as a broker or agent, and only if such activity does not involve any personal financial liability.

SEBI observed that certain stock brokers were facilitating the buying and selling of digital gold for their clients, an instrument that does not qualify as a ‘security’ under the Securities Contracts (Regulation) Act, 1956 (SCRA). Consequently, through a letter dated August 3, 2021, SEBI informed stock exchanges that such activity violated Rule 8(3)(f) of the SCRR and directed members to refrain from undertaking it.

Pursuant to SEBI’s communication, the NSE issued a circular dated August 10, 2021, instructing its members to discontinue the offering of digital gold and ensure strict compliance with applicable regulations. Members who were engaged in such activities were granted one month to cease facilitating the buying and selling of digital gold on their platforms.

No for stock brokers, but no holds-barred for electronic platforms

SEBI barring its regulated securities intermediaries from dealing in or advising on digital gold did not stop the whole range of other popular public places having millions of hit every day – the e-commerce platforms, payment gateways, wallets or online payment devices. Almost all of them are aligned to some or the other digital gold seller, and permit both buying and selling of digital on or through their platforms.

RBI, has till now maintained silence on such activities, and therefore, several NBFCs have been offering digital gold on their platforms.

The rule is simple – wherever there is a footfall, there is an opportunity to make money by selling digital gold.

In a regulatory blackhole, investors continue to flock to a market where there is least oversight. There is supposedly a deposit of gold, a custodian and trustee mechanism, but nowhere do any of the rules require these custodians or the trustees to be regulated, which, in fact, they are not. In short, even if the existing major players abide by some unwritten self-assumed rules of fair game, there is no entry barrier in the business, nor are there any mechanics of clearing or settlement of trades done on the multitudes of platforms which are now freely selling such digital gold. The scenario, if the past history of unregulated instruments is any indication, is the perfect recipe for an implosion.

As a key principle, wherever someone markets an investment-based product to the public, there is a fiduciary relationship. Which means there is someone on whom investors are putting their trust. Investors can put trustin an eco-system which has regulators, supervisors, capital requirements, mechanics to ensure that the digital paper at no point is less than the real metal behind.  If neither of these are there, how can each regulator keep looking sideways for the other regulator to rise to the occasion?

Creation of a Self-Regulatory Organisation for digital gold

On December 2, 2025, the India Bullion and Jewellers Association (IBJA) announced the establishment of a self-regulatory division for the digital gold industry. This may have been influenced by SEBI’s  warnings (referred above)  to  investors that digital gold products are neither regulated as securities nor as commodity derivatives, with SEBI feigning lack of jurisdiction. 

Among others, the self-regulatory framework has proposed rules on minimum purity,  physical backing, insurance, and segregation of the underlying bullion in addition to consumer Protection rules on clear communication of risks, fees, and a defined grievance redressal mechanism.

Further, IBJA will establish a Digital Gold Transparency Portal to publicly display anonymized, aggregated compliance data and summaries of audit findings.

The final self-regulatory framework is set to be published by March 31, 2026.

The key features of an SRO, essential for its credibility, as pointed out in RBI’s Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs), include the following: 

• Authority & Governance: Power to set/enforce standards with strong, transparent governance.
• Rule-making & Oversight: Clear, consultative rules and monitoring of members.
• Conduct & Discipline: Defined codes with non-monetary penalties (e.g., reprimand, expulsion).
• Compliance Focus: Promote adherence to Reserve Bank of India regulations.
• Dispute Resolution: Standardized and transparent mechanisms.
• Surveillance: Effective monitoring of members and sector.
• Ecosystem Development: Promote best practices aligned with regulations.

. SROs are, of course, bodies consisting of the industry participants, but in order to be optically and substantively having the right to introduce code of conduct, these bodies need to have leadership that is sufficiently empowered to lay such code. It is the constitution and independence of the SRO that will render it credibility.

In any case, self regulation is not the alibi for lack of regulation – therefore, the author still strongly feels that the instrument has become far too retail-centric and far too popular for the regulators to keep shunning from action. 

Electronic Gold Receipts (EGRs)

While digital gold is currently in a state of regulatory blackhole,SEBI recognises EGRs, a scheme which was launched after a 2023 Budget announcement. Till 2024, SEBI was still  fine tuning the Master Circular, which was issued in June, 2024. This has elaborate mechanism for registered vault managers who store the physical gold against which EGRs are issued, complete with insurance, grievance redressal mechanisms, etc. All of this atypical of a regulated instrument. But given the competition EGRs face from their unleashed brother, EGRs are nowhere in the range of visibility, compared to digital gold.

Concluding Remarks

The volumes of digital gold keep rising while the instrument itself continues to stay in a state of regulatory dark spotwith some warning circulars issued by the SEBI such as the one on Nov 8. However, it lacks any regulatory clarity, any authority which can take accountability if anything goes wrong.

In this prevailing environment for digital gold, every player continues to revel and make money. The digital gold sellers are reporting PAT rises of over 200%; the GST department must be enjoying the 3% GST it charges on the trades, and each of the multiple platforms that facilitate the trades likewise make money. If gold is one of the metals that has least bid-ask spreads, then the question is – where is all this profit, for so many of the players, coming from?

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^[1] Some of the digital gold sellers are private companies, whose annual reports are not in public domain. Many of the numbers stated in the article are, therefore, based on the financials/other reports on the website of Augmont.