The government is considering stricter regulations, including mandatory physical gold backing and joint supervision by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). This move follows SEBI's November 2025 advisory, which explicitly stated that digital gold products are neither notified as securities nor regulated as commodity derivatives, leaving them entirely outside SEBI's purview. The proposed framework aims to bring this rapidly growing segment under formal oversight, addressing significant risks that have emerged alongside its popularity.
The core issue prompting intervention is a fundamental classification gap. Digital gold sits in a grey zone—it is not a security, not a traditional commodity exchange product, and not yet defined as a separate regulated asset class. Consequently, it falls outside the supervision of both SEBI and RBI. This regulatory vacuum exposes investors to substantial counterparty and operational risks. SEBI's 2025 warning highlighted that unregulated intermediaries handle investor funds, storage mechanisms for physical backing are unclear, and there is an absence of investor grievance redressal or standard valuation checks. The lack of statutory oversight has also allowed some fly-by-night operators to enter the sector, raising concerns about investor protection and potential money laundering.
The proposed joint oversight will fundamentally reshape the operational structure of digital gold providers. A broad consensus has emerged to classify digital gold as a security under the Securities Contracts (Regulation) Act, 1956. This reclassification would bring platforms under SEBI's regulatory framework, ending their current unregulated status. The most significant operational change will be the requirement for mandatory 1:1 physical backing. Every unit of digital gold sold must be backed by equivalent physical bullion stored in secure vaults.
This full-reserve model creates substantial working capital demands. Issuers must immediately purchase and store physical gold for every sale, immobilizing capital that cannot be deployed elsewhere. For a $3 billion industry, this represents massive capital lock-up. Additionally, issuers face ongoing costs for professional vault storage (typically 0.30% to 0.50% annually), comprehensive insurance premiums (0.10% to 0.25% of portfolio value), and the infrastructure for high-security vaults, regular audits, and logistics. Compliance costs will also rise significantly due to the need for legal and compliance teams, enhanced KYC/AML systems, and standardized reporting to both regulators.
The increased costs will inevitably influence pricing. Currently, digital gold carries a 3% GST on purchase and a buy-sell spread of 2.5% to 5%, but no annual management fee. Gold ETFs, conversely, have no GST on purchase but charge an annual expense ratio. Mandatory physical backing may compress the buy-sell spreads that platforms currently charge as regulatory oversight increases transparency and competition intensifies. However, the higher entry costs for digital gold (GST plus spread) mean Gold ETFs may remain cheaper for short-term holdings, while digital gold could be more cost-efficient for longer holding periods due to the absence of annual expense ratios.
The regulatory shift will also alter competitive positioning. Digital gold currently holds advantages like ultra-low entry barriers (investments can start at ₹10), no Demat account requirement, and 24/7 trading. Gold ETFs offer SEBI regulation, faster long-term capital gains tax eligibility (12 months vs. 24 months), and exchange liquidity. Under the new framework, digital gold gains regulatory credibility, narrowing the gap with ETFs. Physical gold, with its cultural value and tangible ownership, will likely maintain its traditional market position, but increased awareness of digital gold risks may reinforce its appeal to conservative investors.
Despite the risks highlighted by experts, digital gold adoption has surged, driven primarily by convenience and demographic shifts. Transactions via UPI hit 123.42 million in November 2025, a 142% jump from January. Millennials and Gen Z are leading the charge, with surveys showing 65% of millennial investors prefer digital gold over physical purchases. The ability to invest small amounts (sometimes as low as ₹1) through trusted apps has turned gold from a "big event" purchase into a habitual micro-investment. Research shows a strong positive relationship between digital awareness and the intention to adopt digital gold, while convenience and security perception are also significant factors.
The mandatory physical backing requirement directly addresses the counterparty and credit risks SEBI warned about. By ensuring gold is held in legally segregated accounts with independent trustees, investors hold direct ownership of specific physical assets rather than unsecured creditor claims. This legal separation is crucial for mitigating the risk that investor gold could be treated as a general company asset during liquidation.
To address hidden risks, RBI and SEBI are expected to implement specific protection mechanisms. These include standardized disclosure requirements for custodians, trustees, and audit reports; access to SEBI's grievance redressal system (SCORES); capital and net worth requirements for platforms; and mandatory periodic third-party audits. These measures aim to transform the market from one based on private commercial contracts to a regulated investment product with statutory safeguards.
The impact on investor confidence and capital flows could be significant. While SEBI's 2025 warning caused a temporary dip in transaction values, participation remained high. The implementation of a comprehensive regulatory framework should enhance long-term confidence by providing institutional validation and quantifiable risk reduction. This may attract institutional investors and risk-averse retail participants who previously avoided the asset class. The market is projected to grow from $1,761 million in 2025 to $4,350 million by 2031, and regulatory clarity should support or potentially accelerate this trajectory by creating a more stable, sustainable investment environment.
The transition to a regulated framework will likely accelerate industry consolidation. Smaller players may struggle to absorb the increased compliance costs, leading to market concentration around established platforms with scale advantages. To survive, platforms will need to achieve scale, diversify revenue streams toward advisory and subscription services, and optimize operational efficiency.
Ultimately, the proposed joint RBI-SEBI oversight represents a necessary evolution for India's digital gold market. While it introduces significant costs and operational challenges for providers, it addresses critical regulatory gaps and investor protection concerns. The transformation promises to create a more robust, trustworthy investment option that combines the digital convenience driving its adoption with the regulatory oversight required for long-term stability. For investors, the shift from an unregulated "wild west" to a supervised market structure should provide greater confidence in the safety and legitimacy of their digital gold holdings.
