Thanks waedi,

"Output Format" is set to SPDIF on the appropriate output (Out 2).
And clock-syncing, whether master or slave, yields the same results ("Internal" or "Input 2").

I can hear the pitch of the guitar coming through in the signal,
But it's just severely garbled as if part of the signal is lost,
And it pops and crackles.

Perhaps the AES ports or cables on the Axe FX are malfunctioning.
However, I don't have any other AES equipment to test against.

Another thought I had was that the RED507 may not in fact convert AES to TOSLINK in the way I expect.

Axe Fx sounds perfect on Phones out.

Tested it one way from the Axe FX into the Digiface:
- Axe FX Set to internal clock (Work Clock "Auto")
- Digiface Clock Mode: Sample Rate 48000 Hz, Clock Source Input 3 (Where Axe FX is plugged in).
The signal I'm hearing has digital interference.
However I can now clearly and consistently hear the guitar coming through;
Before It was sometime pure noise, and sometimes clearer.
I did notice that in the Digiface Driver Settings the Clock Source and Input Status cannot maintain a lock.
They lock and unlock randomly maybe ten times a minute (see images Axe FX Sync below).

Testing the RED I could not get any signal to run out and back into it.
The TOSLINK cables are good because they did carry a signal looped back into the Digiface on it's own.
And the AES cables work at least for an analogue signal from Axe FX Output 1 into my ADA8200.

The Axe FX has the latest firmware available for that model (Ares v2.0).
I also have the latest RME drivers and firmware (0.9735 and Revision 17 respectively.)

Such a mystery.

When I setup my ADA8200 as a master clock into the Digiface it locks instantly and permanently.
It says "Sync" instead of "Lock".
Reading page 65 of the Digiface Manual reveals that:
1. "Lock" indicates establishing a "Phase Locked Loop" with the transmitter to begin communications.
2. "Sync" indicates a synchronizing of clocks via that underlying working communications.
So perhaps the Axe FX cannot even establish a lock, hence the noise?

Axe FX Sync:

I'll test the RED again to make sure.
I assume I would need two of the Lindy Converter's one for each direction?

I was able to see a momentary "Sync" Status by doing the following:
1. A bidirectional connection to the Axe FX.
2. Axe FX World Clock set to "SPDIF/AES In".
3. Also set the Axe FX Main Input Source to "SPDIF/AES".
4. Set Digiface Clock Source to "Internal" and Out 3 to "SPDIF".

If I played my guitar into the Axe FX via SPDIF (via RED507)
And I plug my headphone directly into the Axe FX Headphones out,
I hear a perfect signal.
I hear a perfect signal even if I set the Axe FX to  it's internal clock.
This means that at least the IN direction of the RED507 is working.
But the OUT  signal to the Digiface is still garbled.

Can you try a simple SPDIF coax/optical converter as available on the internet for a very small price...?

In reality there are very little to no audible advantages with going digital. Complications yes as you noticed.
SOS magazine called analogue the universal digital connection lol.