Gold is Gold is Gold
but digital gold is special — ok?
As with most of my posts lately — this started as a look into how different regulators regulate the same asset class differently ( More about this some other day ). I dug into gold-related products to see how they are different and thought it would make sense to have a post dedicated to that and take a dig at the anomaly that is Digital gold.
TLDR: Digital gold does not appear to have a clear regulation. Payment apps seem to be using it to sidestep wallet regulation. When the underlying asset is the same, why are there different AML/KYC norms?
Anomaly that is Digital gold
Digital gold caught my attention after RBI put a stop to the wallet party with its master directions on issuance and operations of prepaid instruments in October 2017, mandating KYC for wallets. No wallets led to creative places to hold cashbacks. Cashbacks turned into gift cards and gold back programs.
Digital gold does not require a KYC or PAN. Payment platforms ( PayTM/GooglePay) allow users to buy, hold and sell digital gold. This seems a lot like a wallet ( with GST while buying and a different sell price ). PayTM also allows for gifting gold and using the accumulated gold to pay for gold purchases in a store.
RBI defines a Prepaid Instrument as “PPIs are payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments.”
This looks and works like a Prepaid Instrument with value stored as gold. Why isn’t it regulated like a Prepaid Instrument?
Vaguely related: Elsewhere in the world, people have sued airline miles programs for the inability to withdraw airline miles points as cash.
Folks like PayTM also structured the product as a savings platform. What is worrying here is that there seems to be no single regulator running this product. Niti Aayog’s report suggesting ways to improve India’s gold market goes more into this.
The same gold purchased through a Gold Mutual Fund has regulatory protection, stronger KYC requirements, transparent commission structures, and redressal mechanisms.
MMTC-PAMP, one of the providers of digital gold has the following in its FAQ :
- Partner Platform is only providing a platform for the customer to access the Gold Accumulation Plan of MMTC-PAMP, India.
- You are responsible for keeping your Partner Platform account details in a secure manner corresponding to existing Partner Platform terms and conditions.
- MMTC-PAMP will act solely on instructions received on the Partner Platform, and will not be liable for any losses/ liabilities due to a breach/misuse of your Partner Platform account.
Personally, this does not inspire much confidence.
When the underlying asset is the same, why are there different AML/KYC norms? Read the next section to see the verbose differences between different gold products.
If I were to extend this logic, would a gold-backed cryptocurrency be legal in India without the requirement for regulation?
This is another example of how a lack of clear regulation favors bigger players with legal teams get to play with smaller players sitting out.
So you want to buy gold — Who doesn’t like to own shiny objects anyway?
Let us take a look at some different ways of accumulating gold ( or its value — For simplicity, I am not looking into gold derivatives ).
Note the regulators and protection ( or lack of ) each of the instruments provide.
1. Sovereign Gold Bond
- Underlying asset: Indian government guarantee to match the gold value
- Issuer/Manager: Government of India
- KYC requirement: PAN
- Holding: Holding Certificate issued by RBI. A depository account can hold a dematerialized Bond.
- Seller commission: 1% of the subscription ( Sovereign Gold Bond 2019–20 )
- Regulator: Reserve Bank of India
- Minimum purchase: 1 gram gold
Additional tidbits:
- 2.50% per annum payable semi-annually on the subscription value
- Tenor of 8 years, exit option after 5 years
- Can be used as collateral for loans
- Tradable on the exchange ( only 190 trades on 11–11–2019 though )
- Can accumulate 4KG / year
- Capital gains on redemption exempted
- Indexation benefit on long term capital gain on trading/transfer of the bonds
- 50 INR discount / Gram on digital purchase
2. Gold ETF ( Example: GOLDBEES )
- Underlying asset: Gold held with a custodian
- Issuer/Manager: Asset Management Companies ( like Nippon India Asset Management Company — 13 Gold ETFs currently listed on NSE )
- KYC requirement: PAN + Proof of Identity + Proof of Address ( Usually provided when opening a depository account )
- Holding: Dematerized holding in a depository account
- Seller commission: Brokerage / Depository fees
- Regulator: Securities and Exchange Board of India
- Minimum purchase: 1 gram gold (GOLDBEES)
Additional tidbits:
- Can directly approach the AMC to create new units in creation unit sizes (1000 Units or multiple for GOLDBEES ) by depositing gold or money.
- Tradable on the exchange ( 6 Crore INR turnover on 11–11–2019)
- GOLDBEES has a size of ~2748 Crore INR ( ~6988 KG gold ) as of October 2019
3. Gold Mutual Funds ( Example: Nippon India Gold Savings Fund )
- Underlying asset: Gold held with a custodian and some cash to facilitate redemption.
- Issuer/Manager: Asset Management Companies ( like Nippon India Asset Management Company)
- KYC requirement: PAN + Proof of Identity + Proof of Address ( Usually provided when opening an account with a mutual fund distributor for the first time )
- Holding: With Mutual Fund Registrar Transfer Agents (RTA) or Dematerized holding in a depository account
- Seller commission: Distributor commission within SEBI norms
- Regulator: Securities and Exchange Board of India
- Minimum purchase: 100 Rs for Nippon India Gold Savings Fund.
Additional tidbits:
- Nippon India Gold Savings Fund has an Exit load ( if redeemed within 1 year of 2% )
- Nippon India Gold Savings Fund has a size of 725 Crore INR as of September 2019
4. Physical Gold ( Example: Purchase from Amazon )
- Underlying asset: Certified physical gold ( Bureau of Indian Standards hallmarked )
- Issuer/Manager: Jewelers like Malabar Gold and Diamonds
- KYC requirement: No KYC for < 2L purchases.
- Holding: Underneath your pillow or where ever you deem safe
- Seller commission: Non-transparent
- Regulator: Multiple regulators — non-transparent
- Minimum purchase: Seller dependent
Additional tidbits:
- Many jewelers have a fixed buyback value for gold coins ( Malabar Gold and Diamonds buys back at 97% value of the benchmark gold rate )
- Jewelers also run a gold savings scheme (Justified as store credit) where buyers deposit money for a few months and then buy gold towards the end of the plan.
5. Digital Gold ( Example: Purchasing gold on Google Pay / PhonePe/ PayTM sold by MMTC-PAMP)
- Underlying asset: Gold held with a custodian (Digital gold seller is the custodian in this case — Weird).
- Issuer/Manager: So far refineries like MMTC-PAMP and Augmont have issued digital gold
- KYC requirement: No KYC for < 2L purchases.
- Holding: On the refineries ledger. The user can have multiple accounts through partners like PhonePe/PayTM.
- Seller commission: Non-transparent
- Regulator: Multiple regulators — non-transparent.
- Minimum purchase: 0.1mg gold and upwards
Additional tidbits:
- Buyers can redeem the accumulated digital gold as physical gold by paying “making and delivery charges”.
Reiterating: When the underlying asset is the same, why are there different AML/KYC norms?
Enough shop talk — I leave you with this.
