Is digital gold safe? Why SEBI’s warning shouldn’t be ignored

When Rashmi gets her monthly salary, the first thing she does is open her favourite investment app. She quickly allocates a portion of her income to digital gold—a habit she developed three years ago. What began as a small experiment has turned into a substantial holding, thanks to the sharp rise in gold prices over the past few years. Like thousands of young investors across India, Rashmi found digital gold an easy and convenient way to own the yellow metal without the hassle of physically storing it.

However, her confidence was recently shaken. On November 8, the Securities and Exchange Board of India (SEBI) issued a public advisory cautioning investors against dealing in digital gold. For many like Rashmi, this was a wake-up call—raising questions about safety, regulation, and the long-term reliability of these glittering investments.

What Is Digital Gold?

Digital gold allows individuals to buy, sell, and hold gold electronically, without ever taking physical delivery unless they choose to. The concept was introduced in India around 2012–13 and has grown rapidly, especially with the rise of fintech apps and UPI-based payment systems.

Here’s how it works:

Authorized importers or suppliers purchase physical gold and store it in secure, insured vaults. Fintech intermediaries such as Paytm, PhonePe, Google Pay, and others partner with these suppliers to offer fractional ownership of gold through mobile apps. When you buy digital gold worth, say, ₹500, the platform allocates an equivalent quantity of 24-karat (99.9% pure) gold in your name, stored on your behalf.

At first glance, it seems simple and transparent—an elegant fusion of technology and tradition. But under the glittering surface lies a murky regulatory picture.

SEBI’s Warning: What It Means

In its latest advisory, SEBI emphasized that digital gold is not classified as a “security” or “derivative” under existing Indian laws. This means it lies outside SEBI’s regulatory jurisdiction. Consequently, any platform or app offering digital gold operates beyond the oversight of India’s capital market watchdog.

The regulator warned investors that they could face financial losses if these suppliers or platforms run into operational or financial trouble. In short, if a digital gold provider goes bankrupt or fails to deliver, investors have little recourse.

This isn’t SEBI’s first warning. Back in 2021, the regulator had issued a similar caution, prohibiting registered intermediaries—such as brokers and portfolio managers—from selling or recommending digital gold products. Following that directive, even the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) stopped facilitating digital gold trades on their platforms.

SEBI’s repeated intervention underlines a critical point: digital gold remains unregulated, and that creates inherent risk.

Why the Concern Now?

Gold has been on a historic rally. In 2024, gold prices surged nearly 60%, driven by geopolitical tensions, trade uncertainties, inflation fears, and aggressive buying by global central banks. The metal crossed an all-time high of $4,300 per ounce globally and ₹1,32,000 per 10 grams in India, according to the World Gold Council.

India, the world’s largest consumer of gold, saw a massive spike in demand—not just for jewellery and coins, but also for digital gold. According to the National Payments Corporation of India (NPCI), transactions for digital gold through UPI platforms grew exponentially over the past year.

This explosive growth, particularly among young, tech-savvy investors, has caught SEBI’s attention. Many people are now storing a significant portion of their savings in digital gold without understanding the associated risks or the absence of a regulatory safety net.

The Regulatory Vacuum

To understand the concern, it’s important to look at who regulates what in India’s financial ecosystem.

• SEBI oversees securities, mutual funds, and capital market intermediaries.
• RBI regulates banks, non-banking financial institutions, and payment systems.
• IRDAI governs insurance products.

But digital gold doesn’t fall under any of these categories. It is neither a financial security nor a currency or insurance product. That means no regulatory body currently has clear authority to supervise digital gold platforms, audit their vault holdings, or enforce investor protection norms.

As a result, investors are dependent entirely on the credibility and operational integrity of the private companies running these platforms. Even if they claim to store gold in secure, audited vaults, there’s no independent verification process mandated by law.

This lack of regulation creates what experts call a “trust gap”—a dangerous blind spot in an otherwise booming financial innovation.

The Players in the Market

Despite these concerns, several major players dominate India’s digital gold landscape:

• MMTC-PAMP: A joint venture between Switzerland’s PAMP SA and India’s state-owned MMTC Limited. It’s the largest and most trusted digital gold provider, backed by physical gold reserves and periodic audits.
• Augmont Gold and SafeGold: Other prominent suppliers providing digital gold through partnerships with fintech apps.

Platforms such as Paytm, PhonePe, Google Pay, and InCred Money act as distributors, connecting retail buyers to these suppliers. Some jewellery brands have also entered the space, allowing customers to convert their digital gold holdings into coins or ornaments.

While the major providers like MMTC-PAMP have robust storage and security systems, smaller or lesser-known platforms may not offer the same assurance—amplifying the risk of counterparty failure.

The Appeal of Digital Gold

Digital gold’s popularity isn’t hard to understand. It has revolutionized the way Indians invest in gold by combining accessibility, transparency, and flexibility.

Key Advantages:

• Convenience: Buy or sell gold anytime, anywhere, without the need for physical storage or security.
• Low Entry Barrier: Investors can start with as little as ₹1 or ₹10, making it highly inclusive.
• Fractional Ownership: Enables small-scale investments and portfolio diversification for all income groups.
• 24x7 Availability: Unlike jewellery stores or banks, digital gold platforms operate round the clock.
• Physical Conversion: Most providers allow users to convert digital holdings into coins, bars, or jewellery when needed.

These features make digital gold particularly attractive for young investors, who prefer flexibility and digital-first solutions over traditional forms of investment.

The Hidden Risks

Despite its advantages, digital gold is not without significant drawbacks. SEBI’s warning draws attention to several key issues:

1. No Regulatory Oversight

Digital gold is not governed by SEBI, RBI, or any financial authority. In case of disputes, fraud, or insolvency of a platform, investors may find themselves without legal protection.

2. Counterparty Risk

While large providers like MMTC-PAMP hold equivalent physical gold in vaults, smaller or newer platforms may not always have sufficient reserves. There’s no independent verification system to ensure that your digital holding truly exists in physical form.

3. Platform Risk

If the fintech platform offering digital gold shuts down, merges, or loses its license, your holdings could become inaccessible. Some platforms have contingency arrangements with gold suppliers, but not all do.

4. Price Discrepancies

Digital gold prices are often 2–3% higher than the market rate, due to platform charges, storage fees, and administrative costs. Additionally, investors must pay 3% GST on purchases, further reducing returns.

Safer Alternatives: SEBI-Regulated Gold Investments

Investors looking for gold exposure have several safer, regulated alternatives.

1. Gold Exchange Traded Funds (ETFs)

Gold ETFs are mutual fund schemes that track the price of physical gold. They are traded on stock exchanges and regulated by SEBI, ensuring transparency and investor protection.

Advantages: High liquidity, low cost, and no storage issues.

2. Gold Mutual Funds

These funds invest in gold ETFs or companies involved in gold mining and refining. They’re ideal for investors who don’t have a Demat account but want indirect exposure to gold prices.

Digital gold represents a fascinating evolution in the way Indians interact with their favourite investment asset. It combines technology, flexibility, and tradition in an accessible form. Yet, it also highlights a dangerous gray zone in India’s financial ecosystem—one that regulators are now taking seriously.

For investors like Rashmi, SEBI’s warning is a timely reminder: what’s easy isn’t always safe. While digital gold may offer glittering returns in the short term, the lack of regulation and investor protection makes it a risky proposition in the long run.

Until a clear regulatory framework emerges, the prudent path lies in regulated and transparent options such as Gold ETFs, gold mutual funds, or Sovereign Gold Bonds—investments where the shine of gold is matched by the security of oversight.