The Indian financial system is undergoing a structural shift with people buying 'digital gold' through apps and payment platforms. These purchases are recorded digitally and, in theory, backed by physical gold stored in private vaults. It appears to be a modern, low-cost savings tool. But it raises a fundamental policy question: can a widely-adopted savings instrument remain outside India’s financial regulatory architecture?

Digital gold appears to have become a mainstream investment option. UPI-based digital gold purchases jumped from Rs 50.9 million in January 2025 to Rs 103.2 million in September 2025 while the corresponding value nearly doubled to Rs 1,410 crore, according to an analysis published by Medianama. Globally, tokenised gold products have surpassed USD 2.5-3 billion driven by rapid adoption. The data confirm that app-based gold buying is now a mass-market behaviour.

Yet the legal framework has failed to keep pace with the development of the financial system. The Securities and Exchange Board of India has clarified that digital gold products are neither notified as securities nor regulated as commodity derivatives. Digital gold may thus expose investors to counterparty and operational risks and remains a private transaction involving the sale of a good. The gap between the legal understanding and the economic behaviour creates incentives and risks that public policy cannot ignore.

A legal and economic analysis shows why unregulated digital gold produces predictable distortions. Platforms earn commissions and spreads by selling digital gold. They do not comply with prudential requirements, disclosure obligations, or custody norms. Investors can find both unregulated digital gold and regulated instruments, such as ETFs and mutual funds, on the same interface. They assume a degree of oversight that does not exist. Behavioural bias amplifies the problem. Gold has been deeply ingrained in India's cultural and economic fabric. Apps position themselves attractively with a small entry price. Therefore, savers often assume digital gold to be a safer investment option than it actually is.

Pricing adds another layer of complexity. Unlike gold ETFs or sovereign gold bonds, digital gold often carries GST, spreads, and markups that are not transparent. Operational and cybersecurity risks are also significant. Typically, platforms offering digital gold face no minimum capital requirements, publish no audit results, and disclose little about their custody arrangements. A single major failure could inflict massive losses on consumers and erode confidence in India's digital finance ecosystem.

India has experienced similar risks in gold savings schemes offered by jewellery brands. They promised bonuses, purity, and future redemption but operated outside the formal system. Several collapsed, leaving depositors in distress. Regulators intervened only after harm occurred.

Arguments against regulation claim that formal oversight could curb innovation, impose compliance costs, and reduce accessibility for small savers. India already offers regulated digital gold options. These instruments demonstrate that innovation and investor safety are closely intertwined.

Small investors should treat digital gold with caution amid regulatory uncertainty. India must establish a regulatory architecture that facilitates the increasing adoption and deepening of retail participation. Digital gold must be backed not only by metal in a vault but also by the certainty of law.