Digital gold along with crypto assets to come under regulatory ambit

Along with cryptocurrency, the finance ministry, the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) are considering bringing digital gold under regulation as well, owing to increasing concerns over unchecked growth in such investments without investor protections that apply to regulated securities.

Representatives of crypto exchanges, Blockchain and Crypto Assets Council (BACC), industry bodies and other stakeholders made their submissions on crypto finance today (Monday) before a parliamentary panel brought together to ascertain their views on opportunities and challenges associated with crypto finance chaired by BJP leader Jayant Sinha.

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 led a review meeting on the digital currency with regulators on deciding a long-term strategy for crypto assets on Saturday, and it was decided that the government will continue to proactively engage with experts and other stakeholders on the evolving technology.

Issues such as transparency, outright claims and guarantees by crypto dealing companies and other unregulated assets for the sake of ringing in more investors are to addressed through this committee.

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.

There is clearly a regulatory arbitrage. We never sold digital gold because we thought its 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, two officials directly related to the matter said.

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.

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.

The RBI had announced its intent to come out with an official digital currency, in the face of the proliferation of cryptocurrencies like Bitcoin about which the central bank has had many concerns.

Private digital currencies have gained popularity in the past decade or so. Here, regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks. On March 4, 2021, the Supreme Court had set aside an RBI circular of April 6, 2018, prohibiting banks and entities regulated by it from providing services in relation to virtual currencies.