RBI Reiterates Warning About Using Bitcoins And Other Virtual Currencies
The Reserve Bank of India has reiterated caution against the use of virtual currencies like Bitcoins. On Tuesday, 5 December in a press release they emphasized the risks again for the third time.
What is Bitcoin?
Bitcoins is a cryptocurrency and a payment system accepted by many organizations around the world. It is entirely a digital currency, available upon use of an open-source software. It is the first decentralized digital currency powered and controlled by users and also the largest one in terms of total market value.
The transaction of Bitcoins happens without any involvement of third parties, but the transactions are recorded in a public ledger, which is available to all users.
Therefore, even without a central authority overlooking, counterfeit currencies and fraudulent exchanges are impossible as all transfers can be tracked. Despite this, the decryption of the identities of the parties involved is very intricate, so privacy and identity security is maintained to some extent. Upon joining Bitcoins system, the blockchain or a copy of the public ledger is made available to the new user.
The Bitcoins system has drawn applause and criticism equally; while Bill Gates refers to it as “better than currency”, Warren Buffet calls it a “bubble” addressing its instability.
Multiple warnings by RBI
The Reserve Bank of India warned the users, holders and traders of Bitcoins and other Virtual currencies like litecoins, bbqcoins, dogecoins etc. first on 24 December, 2013 when virtual currencies were still a growing community.
The RBI had declared that it gives no regulatory approvals, registration or authorisation to the Virtual Currency system. The persons using VCs are vulnerable to financial, operational, legal, customer protection and security related risks.
In the press release of 1 February, 2017, RBI repeated the caution referring to the previous one.
Recently there has been a “wake of significant spurt in the valuation of many VCs and rapid growth in Initial Coin Offerings (ICOs)”, where Bitcoin soared up to a record high of $11,800 on 3rd in this month . RBI mentioned by Jose J. Kattoor, the Chief General Manager that the current situation calls for a reiteration of the warnings.
Why the Warning?
Recently, a bench of Chief Justice Dipak Misra and Justices A.M. Khanwilkar and D.Y. Chandrachud issued a notice to the ministries of Finance, Law and Justice, Enforcement Directorate, the Income tax department, the market regulator SEBI and the RBI regarding thed bitcoins.
The petition filed through advocate P.N. Razdan, pleaded for a regulatory step on Bitcoins which keeps growing with more than 2500 new users a day and has reached 5 lakh downloads domestically.
Following are the reasons of flagging the concern, as given by Ajit Prasad, the Assistant General Manager of RBI.
- As the Bitcoins are stored digitally, the wallet is subject to losses arising out of hacking, loss of password, compromise of access credentials, malware attack, and since there is no regulatory authority present, loss of the wallet for any reason, could be permanent and irretrievable.
- For the same reason of absent central authority, customer problems and disputes will be unresolved, leading to probable loss of wealth.
- Volatility in value could harm the users’ interests.
- Lastly, there is the threat of violation of Anti Money Laundering and Combating The Financing of Terrorism. Media reports say that illicit activities are funded by the Bitcoins, and in that case, some users could unknowingly get involved.
However, the central bank is currently studying the usage of virtual currencies under the extant legal and regulatory framework in India, including Foreign Exchange and Payment Systems laws and regulations.