Illustration: Jayachandran R

The reason is that: a Indian Securities and Exchange Board (CAB) Circular, issued October 21, Registered Prohibited Investment Advisors RIAs from providing uncontrolled activities, such as providing a platform for buying and selling uncontrolled products – including digital gold. General language leaves room for many other optional resources, such as Crypto.

Since India has not been able to determine the legitimacy of various new financial instruments, Seb’s action is, in fact, a kind of shadow rule (that is, until well-thought-out laws are in place). But since Seb’s authority is somewhat narrow, the new rules only apply to financial entities that are self-registered with the market regulator.

“We are in a state of total judicial control. Regulatory bodies b Bank of India Reserve (RBI) and other unregulated entities may continue to supply digital gold, ”the CEO said.

Clearly, the rules of differentiation have started to create a lot of heartache in the Fintech industry. The new ban will soon allow stock brokers to distribute digital gold on their platforms shortly after September 10, following a recommendation on stock exchanges in August.

In practice, such as Fintech companies Paytm Or Groww, a subsidiary of CBI RIA, may offer crypto or digital gold to its customers as financial plans. But that is not possible now. If he does, the superintendent may impose a fine, allow the companies to return the money with interest to their customers, and even worse, even cancel their subscription. The risk of revocation of a license already has the effect of duplicating it. On the one hand, there are more and more Fintech companies that are modifying their structures and migrating their digital gold business. On the other hand, some organizations are considering writing to the supervisor for more legal transparency.

In response to all this confusion, Sebi advised the government to provide digital gold supplies as guarantees in the upcoming union budget, two people familiar with the matter said.

“The only way around this is if digital gold is guaranteed as an amendment to the Securities Regulation Act (SCRA) and the SAB Act. Then, digital gold will be regulated and all RIAs, brokers and affiliates will be able to supply digital gold.”

“Essentially, all gold trade is under our control. Therefore, digital gold is not very widespread, ”said the second person mentioned above. If something goes wrong, even the controlled area will be affected. Our circuit is primarily targeted. The official added that those in control of the ring fence. An email to Sebi has not yet been answered.

Dark zone

Initially, digital gold was only available at. Metal and Mining Corporation Corporation of India (MTC), Public Sector Work. The MTC supply was a joint venture with PAMP and a gold refinery from Switzerland. It was marketed as a New Age investment tool that allows an investor to invest in 24 carats of gold, which is stored in MMTC-PAMP securities.

However, five years after its first trips to MTC, the digital gold market now has dozens of private players. The total number of digital gold tags on various platforms has reached 120 million this year.

Gold is also a particularly cautious investment in the Indian context. The country is the world’s second-largest producer of gold and has a strong tendency to convert home savings into gold. Investors are currently trading in digital gold on average. 500-1,200, indicates the presence of small-time retail investors.

“The question is here. What if the gold is not under the control of them (Fintech players)? Who is monitoring these private players?” Said the CEO of one of the largest Fintech companies in India.

For investment apps like Upstox and Groww, digital gold was a way to bring more users to the platform. Compared to stocks, digital gold is easy to understand and has served as a major drawback for lower pyramid investors. These investors gradually graduated into complex products.

So far so good. But the advent of private players has led to creativity, which has added to the complexity.

Take Europe, for example. In 2018, a cryptocurrency company was set up to enable Indians to invest in gold and silver-backed cryptocurrency tokens. He created another company Cryptop It is backed by digital gold and has no control over it. Another is to consider the implications of income tax laws or foreign exchange for storing gold in Switzerland.

The regulator could not help but notice the growing digital gold market and other uncontrolled assets being sold as financial innovations.

“I think digital gold was selling strongly, and I think Seby should have come in,” said Nitin Kamat, founder and CEO of Fintech Tech. Whenever (Sebi) sees retailers taking risks, that’s when they usually jump in and explain, ”he added.

Seby mentioned digital gold in particular because it was seen correctly on all platforms. But there are other offerings that could fall under this broad ‘unforeseen commodity’: such as international investment (allowing Indians to invest in US stocks), platforms for investing in unlisted stocks, pre-IPO orders and cryptocurrency.

This is how pre-IPO commands work. If Paytm’s public offer opens at 8 a.m. on a particular day, some intermediaries will start collecting orders on behalf of their customers before then, which may take advantage of the feeling surrounding the initial public offering (IPO). Technically, the orders should only be collected in the IPO window. Then everyone has the same information about the status of the subscription.

The first official mentioned in the story said, “Sebi has deliberately expanded the word (thereby) to keep all uncontrolled financial products out of control.”

“It should be noted that products such as digital gold are uncontrolled and there are control gaps in terms of quality control and storage security, which can be plugged in at the same level. Law Advisors.

Controlled value

FinSec Law’s Parekh believes that the risks associated with uncontrolled nature of digital gold are valid, and that the ban will not be fully resolved. “It can only erode the confidence of investors in the product,” he said. Parek also expressed doubts about the legality of the circular.

Many Fintech companies, now controlled by Sebi and offering digital gold, have begun to restructure their businesses. For example, Paytm Gold, a Sebi-controlled brokerage firm that was part of Paytm Gold, has now been transferred to the parent company. “The company immediately removed digital gold from Paytm Money and brought it under the One97 Communications Ltd Paytm app, which is not controlled by Sebi. All uncontrolled entities can continue to supply digital gold, ”said the founder of the Digital Gold Forum, who spoke on condition of anonymity.

“There is no transaction,” a Paytm spokesman said in an email. Digital Gold has always been a product of OCL (One97 Communications Ltd). The company’s draft Red Herring Prospectus also states that digital gold will be supplied by OCL in partnership with Partner. Access to digital gold was previously available through the Paytm and Paytm Money apps. It is currently only available through the Paytm app.

“Yes, we are under Sebi’s control and we are working to comply with the circular,” Kuvera, an online platform for financial products, said on Twitter on November 8. We provide a seamless transition for our users.

“If there is an uncontrolled entity, such a entity can technically purchase / sell and monitor digital gold. Vatsal Gauer, partner, Pierre Council, law firm said.

In other words, co-directing will be a concern and the supervisor may take action. Some other companies have temporarily stopped supplying digital gold.

For uncontrolled digital gold platforms, the SBI ban has been turned into a benefit and demand has grown rapidly. But even they are being questioned about how the circular will affect them and their business.

The co-founder of the Digital Gold Forum mentioned above said, “Two of our VCs (Venture Capital Fund) contacted us and asked if we were affected by this circular. He had to explain that it had no effect on us. “

People like Zerodah are thinking of writing to the supervisor for informal guidance. “We are now in the process of requesting an informal directive on some of these products,” said Zeroda Kamat. “There is a clear level of regulation. We do not know because we think we are not selling digital gold. It is not a good product.

The same thing is happening in crypto space. The crypto market is growing but we have to sit back and watch. Therefore, we are developing an informal guideline on whether these 2-3 products are allowed or not, ”added Kamat.

“If we start to do some unexpected things by being one of the big players and we are exposed to it, the impact on us will be much greater than that of some small players. Supervisors see us today as MII (market infrastructure or exchanges).

Next?

It is undeniable that the Superintendent has set up a circular to cover as many uncontrolled assets as possible. So, at least for a while, the confusion over whether or not new entities will be able to offer innovative products will continue.

There is a school of thought that investors generally understand the risk before fining their money and therefore should not be deterred by financial products. However, the desire to buy gold in small denominations continues to sway the gold-rich people of India.

The only way out is to bring the digital gold to a well-organized area under an umbrella and eliminate control arbitration.

In this case, when a product is controlled by two controllers – RBI and SEB, it only increases the chance of control. This sometimes produces good results.

The regulators and the government seem to have realized this. That’s why digital gold could come under Sebi’s law in the next budget. While that will fix some of the confusion, it will inevitably increase compliance requirements for non-registered entities. However, as India embarks on a slow and unstable process to take control of new assets from crypto to foreign stocks, compliance with certain standards and common rules may be necessary.

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