Last week, as per SEBI instructions, NSE asked all its registered members not to sell digital gold on its platform. There were a number of reasons why SEBI has been quick to bring about this ban.
Digital gold is not a security
Under the extant SEBI regulations, all registered members of both the NSE and BSE can only sell securities. It has been quite comprehensively defined as to what constitutes a security. Equity shares, futures on equity and indices, options on equity and indices and F&O on commodities are all classified as Securities. Under the Securities Contract Regulation Act (SCRA), digital gold is not a security and hence brokers selling digital gold goes against the rule book.
No exclusive SEBI regulation
Unlike equities, futures and options; not much of the digital gold is really under SEBI purview. Today, equity listing, F&O inclusion and exclusion, listing rules are all under the purview of SEBI. However, in the case of digital gold, it is created by a third party and SEBI does not have any control over the quantum of digital gold that can be issued. SEBI has not been comfortable allowing brokers to be selling a product that is not under the purview of SEBI regulation. Most of the digital gold today is sold through digital platforms like Paytm, Google Pay and Phone PE, which do not exactly come under SEBI regulation. That is a hassle.
Lack of audit and inspection trail
A major concern for SEBI was that the digital gold was based on the assurance that the digital gold was backed by ring-fenced physical gold in the vaults of a nodal agency like MMTC. However, the concern for SEBI is that there is no way that SEBI can really monitory and audit if such rules are being adhered to. For example, a big question is whether the digital gold originators like MMTC PAMP can handle the pressure if there is a surge in demand to convert digital gold into physical gold. SEBI was not too comfortable with registered members of the stock exchanges selling such digital products. Audit trail was a big challenge.
Will it impact broker volumes
That is unlikely to happen. Digital gold in India has largely been a wallet item. For example, Phone Pe alone has 35% market share of all digital gold sold in India. If you add Paytm and Google Pay, they would account for a chunk of the Indian digital gold selling market. The overall gold purchase in the form of digital gold is just about 1.4% and the brokers constitute a very small portion. The brokers registered with SEBI can still sell Sovereign Gold Bonds and gold ETFs. For customers, they can still buy digital gold from the digital wallets like Paytm, Phone Pe and Google Pay. SEBI is right in flagging the risk of brokers selling products that are regulated by SEBI. That will be good for markets!