In today’s Finshots, we dive into why digital gold became such a popular product even though it remains unregulated.

But here’s a quick sidenote before we begin. Finshots Idea Lab is back with season 2! Compete in 3 rounds to solve real-world business problems and receive cash prizes worth ₹2.25 lakh, Pre-Placement Interviews, Exclusive Goodies and a lot more! Click here to know more about the competition and apply.

Now, on to today’s story.

The Story

You’ve probably already heard this by now. Digital gold is unregulated.

That’s the alarm, market regulator SEBI (Securities and Exchange Board of India) sounded last weekend. Its message was simple. Digital gold doesn’t count as a security like a stock. Nor does it qualify as a commodity derivative like gold futures, where traders agree to buy gold at a pre-decided price on a future date, hoping that the price increases.

And since digital gold doesn’t fit into either of these buckets, SEBI can’t regulate it. Neither can the RBI (Reserve Bank of India), because it’s not a banking, deposit, or payment product. It doesn’t neatly fit into anyone’s rulebook. It’s just a digital way of buying gold, sitting outside every existing category.

So when you open an app and tap the “buy digital gold” button, you’re basically trusting the platform to take your money and store an equivalent amount of physical gold for you in a vault somewhere. And if everyone who’s ever bought digital gold suddenly says, “Hey, I want delivery of my gold” or “I want to redeem”, the platform should ideally have enough gold to honour those requests instantly.

Which is also where the precise problem lies. These platforms operate like regular businesses. They don’t fall under any financial regulator. There’s no law that forces them to disclose how much gold they’re holding, whether it matches customer balances, or whether the storage is fully backed at all times. Some claim to undergo audits, but nothing is mandated.

So if even one major platform hasn’t actually stocked the gold it promised, and people start redeeming in large numbers, we might find ourselves dealing with a crisis we didn’t see coming.

But then, it made us wonder, “Digital gold has been around in India for over a decade. So, if it’s unregulated, how did it manage to grow this big without anyone stepping in?”

Well, to get to the bottom of that, we’ll have to understand how digital gold investments proliferated in the first place.

In 2012, Augmont, a company dealing in precious metals from refining to retailing, began experimenting with digital ways of selling gold in India. At that time, the only two practical ways to invest in gold were to buy it physically or invest in gold ETFs (Exchange Traded Funds). These ETFs track gold prices by holding physical gold in secure vaults, and trade on stock exchanges just like stocks. Basically, they’re a convenient way to own gold without storing it yourself.

But the problem with these two methods was that in the former, you’d have to take the risk of storing physical gold on your own. And if someone wanted to use ETFs as a way to slowly save up for physical gold in the future, they’d eventually have to sell their ETF units, pay capital gains tax on the profits, and only then buy the gold. Plus, investing wasn’t as simple as firing up an app back then. Getting a demat account to invest in ETFs was another added headache. So you can imagine why that didn’t seem feasible for small investors and why Augmont spotted a gap there.

So it introduced the idea of fractional digital gold, letting people buy gold digitally starting from as low as ₹1, while the company stored equivalent physical gold in secure, third-party vaults. It even offered features like buying gold with a small down payment and paying the rest in instalments.

And the idea clicked. India has always had an obsession with gold, and if owning it became as easy as tapping a button, people were more than happy to jump in.

Soon after, MMTC-PAMP, a joint venture between government-owned MMTC Ltd. and Swiss refiner MKS PAMP, emerged as another major player. It was (and still is) India’s largest gold refiner and eventually became the biggest custodian of digital gold in the country.

It then partnered with companies like Motilal Oswal, Paytm, and PhonePe for wider distribution. And for these platforms, the tie-up was a win-win for two big reasons.

First, around 2017, the RBI tightened rules for wallets. If a company wanted to run a wallet like Paytm Wallet, they had to follow strict KYC (Know Your Customer) norms and regulatory requirements. Digital gold, however, didn’t fall under any wallet regulations. And because jewellery purchases below ₹2 lakh didn’t require KYC under PMLA (Prevention of Money Laundering Act) rules, apps realised they could let users buy small amounts of digital gold without the paperwork. And once users held that gold balance inside the app, it helped these platforms retain some of the business they were losing from people who didn’t want to open wallets because of the stricter KYC rules.

Second, digital gold became a great onboarding tool. Once customers were buying gold on the app, platforms could nudge them into exploring other financial products. That’s how players like HDFC Securities, Upstox, and Groww also began offering digital gold.

And that gave digital gold serious momentum. People could invest tiny amounts, set up SIPs (Systematic Investment Plans), and treat it almost like a savings product. By 2021, stockbrokers were estimated to account for 10–12% of the roughly ₹5,000 crore worth of digital gold sold in India annually. And since nearly 85% of customers never requested physical delivery, it created an uncomfortable possibility. If a platform wasn’t maintaining sufficient gold reserves, redemptions could be funded using money from new buyers. Not that digital gold is a Ponzi scheme, but without mandated audits, the risk of such a situation going unnoticed was very real.

And you could say that this was the moment regulators finally realised how big the problem had become. But by then, it was too late to step in with fresh rules. Or rather, impossible. No regulator actually had the authority to oversee digital gold in the first place, simply because of how it was classified, as we explained at the start. So SEBI did the only thing it could do. It told its regulated intermediaries — stockbrokers and later even registered investment advisers, to stop offering or recommending digital gold to customers.

So in hindsight, you see that digital gold was never officially “allowed”. But no regulator could ban it either. And when something sits in that grey zone, it’s technically legal by default. Platforms capitalised on that ambiguity. It became a bit like those gold purchase schemes your neighbourhood jeweller offers — unregulated, based on trust, and meant for people who plan to buy gold later. If anything goes wrong, all you have is the protection of ordinary company and consumer laws.

And that’s exactly how digital gold managed to grow as big as a ₹13,800 crore market today.

But now, SEBI has made its concerns clearer. If something goes wrong with digital gold, it has no legal authority to step in and protect investors.

So what does that mean for you, you ask?

Well, first things first. If you’ve invested in digital gold, don’t panic. Many analysts suggest that investors gradually shift to SEBI regulated gold ETFs or EGRs (Electronic Gold Receipts). EGRs are slightly different from ETFs. In the sense, they’re receipts traded on the stock exchange that represent physical gold stored in a vault, and they can eventually be redeemed for actual gold.

They also tend to be more cost-efficient. Because with digital gold, you usually pay a higher price to cover storage, insurance, and platform margins, plus a 3% GST on your purchase. Which means that even if gold prices rise by, say, 2% the next day, you could still end up selling at a loss because of these embedded costs.

So yeah, if you already hold digital gold, you could either take delivery, sell and shift the money to regulated options, or simply leave your existing holdings untouched if you trust the platform (at your own discretion and risk) and start any fresh investments through ETFs or EGRs instead.

Because a mass panic exit is the quickest way to make a worry turn real. And we definitely don’t want that.

Until next time…

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