Digital Gold (e-Gold)
Context:
The Securities and Exchange Board of India (Sebi) has cautioned the general public against investing in digital gold and e-gold products.
A steep rise in gold prices and the convenience of online platforms have led to a surge in their popularity
What is Digital Gold (e-Gold)?
It refers to buying gold electronically without physically possessing the precious metal
The price of digital gold is linked to that of physical gold
It is often created using blockchain technology
Key Features:
It allows investors to own gold with smaller investment amounts. This is unlike traditional purchases
It eliminates the hassles and challenges of storing physical gold
It can be converted into physical gold whenever required by the investor
It is offered by many jewellers and various online platforms
Risks Associated with Digital Gold
Sebi has clarified that digital gold is unregulated.
It is neither notified as 'securities' nor regulated as 'commodity derivatives'
The product runs counterparty risk
This means that there is always a risk of default from the platform or seller.
This is noted as Sebi's biggest worry
Investors are exposed to significant counterparty and operational risks.
None of the investor protection mechanisms available in the securities market apply to digital gold
Digital Gold vs. Regulated Gold Products (like Gold ETFs)
Investing in digital gold does not require a demat account or margin deposits
This is making it seem more convenient.
Gold ETFs and commodity derivatives do need a demat account.
Gold ETFs are offered by mutual funds and are regulated by Sebi
Digital gold is not
Regulated gold products are considered safer.
For example, commodity derivatives on exchanges like MCX are guaranteed by a clearing corporation, eliminating default risk from counterparties
Sebi-Regulated Investment Structure:
Sebi encourages investors to opt for its regulated avenues.
These include:
Gold ETFs offered by mutual funds
Sovereign Gold Bonds (SGBs)
Electronic Gold Receipts (EGRs) which are tradeable on stock exchanges
Exchange-traded commodity derivatives on regulated exchanges like MCX and NSE.