Digital gold may come under the purview of the regulator

The government plans to address the issues of transparency, outrageous claims and high promises made by some companies in unregulated assets to lure investors.

As part of the plan, the government may amend the SEBI Act and the Securities Contracts Regulation Act to classify digital gold as a security, two officials with direct knowledge of the matter requested anonymity.

Prime Minister Narendra Modi on Saturday held a meeting with regulators to decide a long-term strategy for crypto assets. Subsequently, the Standing Committee on Finance held a meeting with stakeholders on Monday to find out their views on the ‘opportunities and challenges associated with crypto finance’.

Mint has reviewed a copy of the notice issued by the Standing Committee for Interaction with Associations and Industry Experts on Crypto. Emailed queries to SEBI and the finance ministry on monitoring of digital gold were not immediately answered.

The proposal to regulate the asset comes after SEBI in September and October barred registered brokers and investment advisors from offering digital gold and other unregulated investment products. The regulator said offering such products is in violation of the SEBI Act and may result in monetary penalty and in some cases, cancellation of license.

Some fintech companies selling digital gold have had to stop such sales, while others have liquidated digital gold offerings to their unregulated parent entities.

Some firms offered digital gold as an investment product to attract customers who were against investing in equity-related products.

The ban opened up an arbitrage opportunity, with RBI-regulated entities and unregulated firms being able to offer digital gold without penalty. “Obviously there is a regulatory arbitrage. We never sold digital gold because we felt it was not a good product nor because of anything else,” said Nithin Kamath, chief executive and founder of Zerodha, a financial services platform he said.

SEBI is in talks with the government to classify digital gold as securities in the upcoming budget. “The only way out is if digital gold is called a security by amending the Securities Contracts (Regulation) Act (SCRA) and the SEBI Act. Then digital gold will be regulated, and all registered investment advisors, brokers and their associated entities will be able to offer digital gold,” said the first of the above two officials.

“Essentially, all gold trading on exchanges is under us anyway, so digital gold is not much of a stretch. SEBI is not concerned with regulating digital gold, but to amend the SEBI Act and link it to gold exchanges. Currently, digital gold is being introduced in a regulatory void. Our circular is essentially aimed at ring-fencing regulated entities,” said another official.

The government is in the process of setting up a regulated gold exchange under the regulatory purview of SEBI. The regulator has already approved the framework for operating gold exchanges, which will enable the convenience of trading of gold through electronic gold receipts. While the issues related to digital gold may be resolved by the next financial year, differences continue between RBI and SEBI over who will regulate the crypto asset.

“SEBI does not believe that it has systems in place to ensure settlement of cryptos as there is no underlying asset for settlement, and RBI does not want to come across a product that is traded/settlement. Even more, RBI does not want crypto to be settled. Saddened by the Supreme Court’s decision of 2020 on regulating the RBI. Only the Finance Ministry can come up with a solution,” the first official said. The Ministry of Finance is working on a bill to regulate crypto and its taxation.