Rajeev Narayan

When India’s markets watchdog, Securities and Exchange Board of India (SEBI), recently issued a public caution on digital gold, it was done without drama. There was no fiery press conference, no parliamentary echo, no market tantrum. Just a carefully-worded investor alert, pointing to risks in app-driven gold purchases that promise fractional ownership, instant liquidity and dematerialised storage. Yet, in its silence lay earth-shaking, seismic intent. India’s gold market, for long informal, unregulated and culturally untouchable, was suddenly put on notice.

For decades, gold in India has thrived outside formal finance. Families buy it as insurance, social signalling, savings and sentiment. Over the years, jewellers have turned into custodians and chit funds have become lenders, with gold morphing into a quasi-currency long before fintech gave the concept an interface. Digital gold was simply the next avatar... sleek, micro-denominated and democratised by apps like Paytm, PhonePe, Google Pay and broker-led platforms. Highly popular, digital gold services crores of people who want the glitter without the locker.

But SEBI’s sudden message is clear. What looks like convenience could be complexity in disguise.

Market analyst Ajay Bagga said in a recent TV interview: “This is not SEBI versus gold, this is SEBI versus opacity.” Another expert noted, “Indians don’t distrust gold; they distrust paperwork. The problem is that apps are replacing paperwork with pop-ups, not disclosures.”

What Triggered the Regulator?

The probable cause of SEBI’s alert lies in a regulatory grey zone. Digital gold platforms operate at the crossroads of commodities, payments, e-commerce and custodial responsibility, where no single regulator governs the business model. Thus, no one owns the liability if the custodian fails, or purity becomes suspect. There is no one to audit the app’s gold reserves, and there is no jurisdiction to turn to if there is cross-platform interoperability or business fallout.

Representational picture of digital gold investment

Insiders say four fault-lines have triggered SEBI’s discomfort.

One: custodial risk. As the model rests on third-party vaulting partners, users do not hold the gold physically, nor do the apps. Thus, the metal sits in vaults managed by intermediaries such as MMTC-PAMP or SafeGold. While these institutions are compliant entities, the chain between the asset and the app is long, opaque and not always disclosed to retail investors.

Two: there is a product misrepresentation risk. Over the past three years, digital gold has been marketed as both an investment and a savings vehicle, though it is neither a regulated deposit nor a security. In many cases, users are nudged by promotional offers, cashback lures and automated prompts that blur the line between consumption, saving and investing.

Three: systemic risk at scale. As digital gold Assets Under Management (AUM) increases, factors such as liquidity freezes or custodian defaults become relevant. India imports 800-900 tonnes of gold annually, driven by household demand. Even a minor systemic blip in digital platforms erodes investor confidence, stressing retail markets during high-demand periods.

Four, precedent risk. If digital gold continues to be sold without safeguards, investors may rush to digital silver, copper, land, sovereign guarantees or tokenised physical assets, without any oversight. And SEBI knows gold alerts may be the first domino in a larger regulatory mishap.

Culture Meets Compliance

In India, gold is not just a commodity, but a memory cast in metal. Weddings, dowry, festivals, inheritance, gifting and even emergency liquidity are tied to its emotional ledger. A McKinsey report on Indian consumer finance has noted that Indians invest not to maximise wealth, but to minimise regret. Gold plays into this psychology perfectly.

Digital gold has only turbocharged that buying pattern. It has made purchasing impulsive, non-ceremonial and subscription-friendly. It has turned tradition into a tap-to-buy habit. Yet, gold’s cultural embrace has also created complacency. For crores of people, the presence of gold implies safety, regardless of the wrapper. This is the behavioural pitfall SEBI is trying to disrupt. A regulator can protect markets, but it can’t regulate sentiment.

As former SEBI chairman M Damodaran once warned: “Financial innovations are welcome, but regulatory arbitrage is not an innovation.” His words now sound prophetic.

Tightening the Loop

The cautious phrasing of SEBI’s advisory signals a prelude, not a conclusion. The next steps could unfold across several new layers. For one, gold trading apps may be expected to file mandatory disclosures on custody chains, audit trails and hedging practices. Also, a licensing regime could emerge and ring-fenced accounts mandated to segregate digital inventories. Enforcement could also expand into influencer and marketing compliance, with new and tougher caveats thrown in.

SEBI’s alert is not a ban or burial, but an inflexion point. The watchdog has acknowledged that innovation has leapfrogged governance, and that at this juncture, it will no longer be a passive spectator while apps repackage legacy asset classes into quasi-investment products. For investors, the message is clear. Convenience is not a credential, tradition is not diligence. For fintechs, the writing is on the wall: seismic adoption will be met with seismic regulation. India’s gold market is too large, emotional and economically embedded to be left to thinking it alone.

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The smartest regulatory outcomes will borrow from India’s proven playbook in digital payments – enable innovation, mandate safeguards, enforce compliance and let adoption scale within clear guardrails. If SEBI gets this right, digital gold may evolve from a glittering experiment into a benchmarked product. If it gets it wrong, India may find its oldest asset class become a liability. The metal has timeless value, but the apps that sell it must prepare for the future.

The writer is a veteran journalist and communications specialist.