RBI warns against usage of Bitcoin and virtual currencies
Moneylife Digital Team 24 December 2013

Apart from outlining several risks, the RBI is presently examining the legal and regulatory framework of virtual currencies like Bitcoin, Litecoin, BBQcoin and Dogecoin

The Reserve Bank of India (RBI) has cautioned users, holders and traders of virtual currencies (VC), including Bitcoin. In a release, the RBI stated that Bitcoin, and other VC, are exposed to the potential financial, operational, legal, customer protection and security related risks.

The RBI said, “the creation, trading or usage of VC including Bitcoin, 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.”

Bitcoin was created to solve the mathematical solution to double-counting but it grew into a separate currency and system altogether and its value has skyrocketed as more and more people, investors and enthusiasts jump into the bandwagon and started transacting in the virtual currency. Earlier Moneylife had written, in detail, a primer on Bitcoin.

The reason people took to Bitcoin, apart from its meteoric rise in value is because there is no regulator to control the currency unlike fiat currencies which get depreciated. However, recently, the Bitcoin has come under attack after hackers managed to penetrate into some of the Bitcoin e-Wallet sites, which caused them to shut down and stop offering Bitcoins for sale.

RBI further said that VC including Bitcoin may pose several other risks to users, including the following:

  • VC being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VC held in them;
  • Payments by VC, such as, Bitcoin take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems, disputes and charge backs etc;
  • There is no underlying or backing of any asset for VC. As such, their value seems to be a matter of speculation. Huge volatility in the value of VC 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 VC, such as, Bitcoin are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VC on such platforms are exposed to legal as well as financial risks;
  • There have been several media reports of the usage of VC, including Bitcoin, 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 has also been looking at the developments relating to certain electronic records claimed to be ‘decentralised digital currency’ or ‘virtual currency’ such as, Bitcoin, Litecoin, BBQcoin, Dogecoin, etc, with their usage or trading in the country and the various media reports in this regard.

The RBI has also stated that, it is presently examining the legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.

You may like to read more stories on virtual currencies:

Bitcoin: Bit of a Con

Here’s the secret Web currency

MMM India, another MLM taking people for “double-your-money” ride

MMM India, QNet ‘cult’ growing. Why government is dragging its feet in tackling this MLM menace?

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