Digital gold may come under regulatory ambit

The finance ministry, the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) are working to bring digital gold, along with crypto assets, under some regulatory oversight, as concerns mount over the unchecked growth in such investments without investor protections that apply to regulated securities.

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

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

Prime Minister Narendra Modi on Saturday chaired a meeting with regulators on deciding a long-term strategy for crypto assets. This followed the standing committee on finance holding a meeting on Monday with stakeholders to ascertain their views on ‘opportunities and challenges associated with crypto finance’.

Mint has reviewed a copy of the notice issued by the standing committee for a dialogue with associations and industry experts on crypto. Emailed queries to Sebi and the finance ministry on supervision of digital gold were not answered immediately.

The proposal to regulate the assets comes after Sebi in September and October barred registered brokers and investment advisers from offering digital gold and other unregulated investment products. The regulator said offering such products was a violation of the Sebi Act and, as a consequence, could lead to monetary penalties and, in some cases, licence cancellations.

Some fintech companies selling digital gold had to stop such sales even as others hived off the digital gold offering to their unregulated parent entities.

Some firms offered digital gold as an investment product to attract customers who were averse to 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 any penalties. “There is clearly a regulatory arbitrage. We never sold digital gold because we thought it’s not a good product and not because of anything else,” said Nithin Kamath, chief executive and founder of Zerodha, a financial services platform.

Sebi is in talks with the government to categorize digital gold as securities in the upcoming budget. “The only way around this is if digital gold is termed as securities by an amendment to the Securities Contracts (Regulation) Act (SCRA) and Sebi Act. Then digital gold would become regulated, and all registered investment advisers, brokers and their connected entities would be able to offer digital gold,” said the first of the two officials cited above.

“Essentially, all gold trading on exchanges is anyway under us, so digital gold is not much of a stretch. Sebi has no concerns in regulating digital gold but requires an amendment to the Sebi Act and linking it to the gold exchanges. Currently, digital gold is being offered in a regulatory vacuum. Our circular is essentially aimed at ring-fencing regulated entities,” the second official said.

The government is in the process of setting up regulated gold exchanges under Sebi’s regulatory purview. The regulator has already approved the framework for operationalizing gold exchanges, which would enable the facilitation of trading in gold through electronic gold receipts. While the issues around digital gold may resolve by the next fiscal, the differences between RBI and Sebi over who should regulate crypto assets continue.

“Sebi does not believe it has systems in place to ensure settlement of crypto as there is no underlying asset to settle, and RBI does not want to get into a product which is traded/settled. Even more so, RBI is saddled with a Supreme Court ruling of 2020 on regulating crypto. Only the finance ministry can come up with a solution,” said the first official. The finance ministry is working on a bill to regulate crypto and its taxation.

Courtesy: Livemint