I. Introduction
Digital Gold allows an investor to purchase and sell gold online without any physical visits. It has gained prominence in a very short period because it does not create any blanket ban on the quantity of gold to be purchased and, most importantly, it saves time and efforts of investors. The Securities and Exchange Board of India (hereinafter, SEBI) introduced the Electronic Gold Receipts (EGR) framework via notification in 2021 to regulate the digital gold. But its regulatory architecture remains asymmetrical. Although Section 2(h)(iia) in the SEBI Act (hereinafter, the Act) recognizes EGRs as ‘security’, triggering the vault manager obligations, who will govern the audit and reports beyond conversion of physical to digital gold and investor protection mechanism. Yet, there are some fintech platforms beyond the SEBI jurisdictional reach involved in the creation of parallel grounds for the sale and purchase of digital gold and its products. This has created regulatory arbitrage based on differentiation in platforms rather than the nature of the commodity.

This is where the ‘regulatory gap’ emerges. This is not an incidental phenomenon but rather stems from structural defaults. It has three overlapping failures: first, the narrow definition of EGR that excludes non-SEBI platforms; second, the jurisdictional silence in existing statutes, i.e., Consumer Protection Act, and IT frameworks which are devoid of SEBI mechanism; third, the absence of equivalence principle to capture digital gold irrespective of platform. These failures have caused the unregulated platforms to enjoy cost arbitrage, avoiding their expense in fulfilling obligations and mandatory requirements of vault managers.

The author seeks to analyze the above failures and their implications by advancing this piece in three arguments. Firstly, examining India’s current framework regulating digital gold; secondly, by comparative analysis of the UK’s Financial Conduct Authority model, the piece seeks to analyze how a functional approach for regulation of digital assets can eliminate platform-based loopholes. Lastly, it proposes certain recommendations to ensure investor protection.

II. Rethinking Digital Gold: Legal Gaps
Fintech platforms offer various schemes for the purchase and sale of digital gold and related products. The majority of these platforms are not recognized by SEBI, which means that any transaction taking place under this category does not qualify as ‘EGR’ as it falls outside SEBI’s jurisdiction. This regulation and audit remain as an insider process which lacks transparency, unlike SEBI registered securities where vault managers have a significant role. This has three implications at large: firstly, the manipulation in the pricing of digital gold on the websites which may not represent the real market values, but rather an internal discussion; secondly, exposing investors to huge risk with no regulations and ultimately, liquidity in some cases; and thirdly, the risk highlighting the regulatory arbitrage. For example, platforms like Google Pay, Paytm Gold, etc., allow investors to purchase digital gold but fall outside the ambit of SEBI’s regulatory framework.

Although the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 in regulation 4 prohibit misleading statements interlinked with securities trading, still the subsisting jurisdictional limit exposes the gap in two-fold: SEBI recognizes the investor risk on one hand, but lacks the authority to regulate those transactions on the other hand. This raises the fundamental question of whether the existing frameworks address this gap or not.

For example, the Consumer Protection Act (CPA) regulates misleading advertisements which activate only when harm has been caused. These provide post-facto remedies but remain largely reactive, unlike SEBI’s preventive approach. The latter works on an audit mechanism with proper risk management, and consumer laws cannot substitute this functionality as it will have a direct impact on investors. Furthermore, the Information Technology Act regulates electronic records ensuring the validity of digital transactions. Its compliance will create an illusionary impact given that gold data is valid, but who will ensure if the risk and management were valid? The implication of this regulatory bypass is misleading advertisement. The continuation of these practices may result in arbitrage. The SEBI has also issued a cautionary notice in order to prevent investors from fraudulent investments. Thus, these regulatory arbitrages stem not only from legislative oversight but also from structural design—that is, the narrow definition of EGRs, the jurisdiction limitation of the statutes as discussed, and the absence of a functional principle to regulate digital gold uniformly. Thereby, the piece shall devolve to the comparative analysis with the UK to analyze the shortcomings in India’s model.

III. Comparative Analysis
The United Kingdom (UK) has grappled with the same tension and today, it has set an exemplary category over governance of digital assets in the globe. The Financial Conduct Authority (hereinafter, FCA) of the UK adopted the functional approach. It interpreted the already existing statute, the Financial Service and Markets Act (hereinafter, the Act), to gain regulatory oversight over the digital assets including gold. Section 19 of the Act specifically asserts that no regulatory activity can be carried without the authorization. It helps FCA maintain oversight over all the commercial activities of digital assets. This has led to the elimination of unregulated markets to a large extent. It restricted advertisement to only those authorized and regulated by FCA, creating a safe market for investors free from misleading pricing. By mandating the disclosure obligations and adequate capital requirements, it has highly eliminated the anti-competitive environment. Thus, the same level playing field has been created after the functionality approach by FCA between different platforms. Unlike the UK with a single regulatory authority, India has fragmented authorities; e.g., SEBI only governs the digital gold listed on its platform, limiting the scope of Section 2(h)(iia). Therefore, fundamental regulation in the country first requires the change in determination of digital gold from institutional form to economic function. The function of digital gold on fintech is similar to vault manager’s EGR; both do not exist in physical forms. Here, the functionality equivalence will eliminate the platform-based arbitrage and establish neutrality. Thus, the UK model provides India with a framework for adoption rather than a blueprint for replication.

IV. Conclusion and Reform Recommendations
The fundamental reform must address the narrow definition of EGR under Section 2(h)(iia). It defines EGR as a security specified by the board without catering to platforms outside the ambit of the board. SEBI must, thereby, first broaden the ambit of the EGR framework by proper regulations and compulsion to all the platforms dealing with digital gold to route their transactions from SEBI recognized exchanges and vault managers. This will ensure their compliance with necessary prerequisite conditions to facilitate the exchange of digital gold and ultimately, lead to the same level playing field.

Secondly, a clear legal authorization from SEBI should be issued evoking its power under Section 11A, whereby the registration of all the investors purchasing and selling gold shall be mandated. This will help the board to supervise the actions of investors and prevent them from fraudulent investments. Further, there is a need for a specific coordinated forum between RBI and SEBI. All the payment platforms, i.e., Paytm, Google Pay, shall obtain dual authorization, where RBI must approve the payment system operation and SEBI must account for digital gold investment products. This will eliminate the lacunae in these platforms whereby they are taking backdoor entries by categorizing them as payment features.

Finally, SEBI should maintain structured stakeholder engagement backed by timely consultation and feedback mechanisms. There shall be regular meetings with the digital gold platforms, vault managers, and all other related bodies to highlight and understand the challenges. A periodic regulatory review shall be done by SEBI to critically analyze and fill the lacunae in the governance of digital gold at the root level. This will prevent fraudulent investments by investors.