RBI Cautions Against use of Bitcoins

The Reserve Bank of India (RBI) has issued a caution notice against bitcoins and other virtual currencies saying that users may end up violating laws against money laundering and terror financing.

Stopping short of declaring a ban on their purchase, RBI said it is examining the issues associated with the usage, holding and trading of virtual currencies under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations. "The creation, trading or usage of virtual currencies (VCs), including bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities. As such, they may pose several risks to their users," RBI said.

Governments in Europe have expressed similar concerns about bitcoins. In its cautionary advice, RBI said that it is looking at the developments related to certain electronic records claimed to be "decentralised digital currency" or "virtual currency", such as, bitcoins, litecoins, bbqcoins and dogecoins, their usage or trading in the country and various media reports in this regard.

Driven by speculators, the value of a bitcoin had shot to $1,124 in November from $13 in January 2013. But its price crashed by 50% after China banned financial institutions from bitcoin transactions earlier this month. In India, the price of bitcoins has fallen to Rs 42,737 from Rs 74,628 in November.

Among the risks, RBI has listed loss due to hacking and malware, loss of password and the absence of an established framework for recourse to customer problems and disputes. But the central bank's main concern appears to be that virtual currencies are being used for illegal activities. "There have been several media reports of the usage of VCs, including bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws," RBI said.

The central bank had earlier described virtual currency as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. Virtual currency schemes provide a financial incentive for virtual community users to continue to participate and are able to generate 'float' revenue for their owners.

Bitcoins are the fastest growing currency in the internet world. They are stored by users in the form of a private key which enables transactions. The private key can be stored in an electronic wallet, which can be a client in a computer or in a pen drive. Unlike fiat money issued by governments or bullion, bitcoins are electronic records of the ownership of the virtual currency. The virtual currency offers users the advantage of low transaction costs and interoperability. But regulators are worried as this route can be used to circumvent laws and government sanctions. Earlier this year, US authorities cracked down on a virtual currency service company - Liberty Reserve - alleging that it was involved in money laundering.

There is no underlying or backing of any asset for virtual currencies. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.

"It is reported that VCs, such as bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks," RBI said.

Times of India, New Delhi, 25-12-2013