Digital gold companies approach Finmin for recognition, promise standardised practices

Digital Gold companies approach Finmin

After digital gold companies’ move to form a self-regulatory organisation (SRO), the firms have made a representation to the Ministry of Finance for government recognition, two sources aware of the development told Moneycontrol.

The representation requesting the recognition of the SRO comes after the markets regulator, Securities and Exchange Commission of India (SEBI), earlier this month, cautioned retail investors that the industry and the digital gold as a product are unregulated.

According to a source, the digital gold ecosystem companies have told the Finance Ministry that they will ensure that only designated bank accounts will be used for transactions.

The SRO will also ensure that empanelled auditors will guarantee that an equal part of physical gold will be kept at a vault corresponding to the amount of digital gold purchased by the customers, they added.

The founding collaborators of the SRO include major entities such as MMTC-PAMP, SafeGold, PhonePe, Augmont, CaratLane, Jar, Gullak, and Muthoot Exim Pvt Ltd.

“Given that gold serves as a crucial savings tool for millions of Indian households and is now being sold via digital platforms, industry participants are establishing a Self-Regulatory Organisation (SRO). The SRO's purpose is to set a standardised code of conduct, uphold transparency, and establish a framework for accountability in the digital gold sector,” the representation to the Finance Ministry said.

Moneycontrol had earlier exclusively reported that digital gold companies are in discussions to form a self-regulatory organisation (SRO) by the end of November.

“Gold sellers will use designated bank accounts, controlled by an independent third-party Trustee, solely for digital gold sales, guaranteeing that an equal amount of physical gold backs all gold sold digitally,” the submission said.

The companies have also promised to conduct regular audits to ensure transparency. All gold sellers will conduct monthly audits of their gold vault holdings, performed by empanelled auditors, the submission stated.

“They will also be required to regularly publish audited digital gold holding balances to ensure that the net physical gold holding matches the digital gold locker balance of their customers,” it said.

The investment in digital gold by Indians is estimated to be around Rs 55,000 crore, backed by physical gold kept in vaults managed by companies like MMTC, SafeGold and Brink’s.

Jar, Paytm, PhonePe, Amazon Pay, Gullak, Tanishq and IndiaGold are among the major customer digital gold selling platforms.

While buying digital gold is legal, there is still no clarity on whether it is regulated or formally recognised by any government authority. SEBI’s advisory has caused concern among industry participants.

One of the many concerns is that if the platforms selling digital gold shut down, customers will find it difficult to withdraw their money/gold.

Another major concern is that if the platforms are not buying physical gold of the same value from manufacturers and are not audited by an independent external organisation, customers could fall prey to fraud.

However, most platforms do have third-party audits ensuring the same, but these reports are not verified by any government body.

The value of digital gold purchased through UPI rose to Rs 2,290 crore in October, compared to Rs 1,410 crore worth of digital gold purchased in September. UPI is the most popular method for buying digital gold in the country.

The number of gold purchasing transactions also rose from over 103 million in September to 116 million in October, a 13 percent rise.

This means that an average gold buying transaction is Rs 230, a small fraction of one gram of gold. These have been popular among millions of lower-middle-class Indians who want to buy gold every month in limited quantities.

The rise in gold price and its role as a safe haven, the ease of purchase and accessibility and more importantly, the fractional ownership drove the customers' interest in digital gold. Customers can buy gold from Re 1 to around Rs 2 lakh per day.

Most fintech platforms sell digital gold as a savings or investment product. The gold value is tokenised by companies like MMTC-PAMP or SafeGold. Customers can sell the gold whenever they want or take delivery of the physical gold.

Investing in digital gold entails GST, storage costs and platform fees. Meanwhile, Gold ETFs are mutual funds that invest in gold and offer the same fractional ownership with fewer charges, apart from being regulated by SEBI.

However, customers need to open a demat account to invest in Gold ETFs. This is akin to investing in the stock markets, hence a large majority of the users find it convenient to purchase digital gold over ETFs.