Sebi warning triggers surge in withdrawals from digital gold fintechs

Following Sebi's warning that digital gold lies outside its regulatory scope, fintechs are facing scrutiny over vault practices, investor safety, and KYC compliance

Fintech platforms offering digital gold have seen nearly a threefold surge in user withdrawals after the Securities and Exchange Board of India (Sebi) last week cautioned the public against dealing in such products, according to industry sources. Many also acknowledged that the advisory has put players in a bind.

 

In a statement on November 8, Sebi said digital gold products were outside the purview of the markets regulator. This meant regulators could not inspect fintech platforms’ physical vaults to verify the presence and purity of the gold, as these entities operated outside regulatory oversight.

 

“Platform users now have clarity that this is an unregulated product. There is no regulator auditing the inventory of physical gold and its purity, which can become a problem,” a founder of a fintech company said, requesting anonymity.

 

Sebi had added that digital or e-gold was being marketed as an alternative for investment in physical gold.

 

“In this context, it is informed that such digital gold products are different from Sebi-regulated gold products as they are neither notified as securities nor regulated as commodity derivatives. They operate entirely outside the purview of Sebi. Such digital gold products may entail significant risks for investors, and may expose them to counterparty and operational risks,” the market regulator had stated.

 

That said, gold prices have softened after several weeks of gains, bringing into focus how platforms manage their vaults to cover user deposits.

 

“There are also concerns on companies following full Know-your-customer (KYC) norms, and what could be the source of user transactions since they may be buying into digital gold without enough safeguards,” another industry player said.

 

Industry players added that focus was now on Gold and Silver ETFs (exchange-traded funds) since they are regulated and hence secure.

 

“Sebi conducts regular audits on entities offering Gold or Silver ETFs. If you buy a digital gold now and sell it right after, you may fetch a lower price since goods and services tax (GST) and commission are involved, which is unlike an ETF,” the founder quoted above explained.

 

However, fintechs believe that they work with authorised gold logistics partners for vaulting, and only provide the technology that enables users to invest in gold.

 

There has been a rise in specialised fintechs such as Jar and Gullak, which have enabled users to invest recurring small-ticket amounts into digital gold.

 

Others such as Paytm, PhonePe, and others have allowed their users to invest in digital gold. 

What Sebi said 

• Digital gold products outside regulator purview 
• Regulators can’t inspect fintech platforms’ physical vaults to verify presence, purity of gold
• Digital gold products may entail risks for investors