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Bitcoin fails to gain currency with RBI

December 25, 2013 12:47 IST

The central bank raises red flag, warns of potential risk.

Virgin group chief Richard Branson has started accepting these and US Federal Reserve Chairman Ben S Bernanke says these hold long-term promise. But Reserve Bank of India (RBI) Governor Raghuram Rajan is not impressed with virtual currencies (VCs), Bitcoins included.

RBI on Tuesday raised the red flag, cautioning users, holders and traders of such currencies against the “potential financial, operational, legal, customer protection and security-related risks they are exposing themselves to”.

Bitcoin is a virtual currency, or crypto-currency, used only for online transactions. Though not backed by any central bank in the world, the currency is traded on a number of exchanges or swapped privately.

The RBI advisory has come within days of China barring financial institutions from handling Bitcoin transactions — a move to regulate the virtual currency after an 89-fold jump in its value sparked investor interest in the country. People’s Bank of China had said it wasn’t a currency with “real meaning” and did not have the same legal status. RBI, too, seems to think on similar lines.

“The creation, trading or usage of VCs, including Bitcoins, as a medium for payment, is 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 out such activities,” RBI said on Tuesday.

According to RBI, since VCs are in a digital form and stored in electronic wallets, these are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack, etc. Since these were not created by or traded through any authorised central registry or agency, the loss of e-wallet could result in a permanent loss of VCs, RBI said.

RBI highlighted several risks from such transactions. For example, since Bitcoins are used for peer-to-peer transactions, without an authorised agency regulating payments, there is no established framework for recourse before customers. Also, there is no underlying or backing of any asset for VCs and their value seems to be a matter of speculation.

“A huge volatility in the value of VCs has been noticed in the recent past. So, the users are exposed to potential losses on account of such volatility in value,” RBI said.

Bitcoin supporters say it is a safer alternative to online payments through credit or debit cards. When one makes an online transaction using a credit or debit card, one is exposed to frauds like phishing. A transaction using Bitcoins is more secure, they argue, as it involves a private key; bitcoin transactions are untraceable.

According to media reports, Branson started accepting Bitcoins as a mode of payment for flights on Virgin Galactic, which offers commercial spaceflights. Bernanke, on the other hand, told senators in a letter that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system”.

RBI said, since VCs were being traded on exchange platforms set up in various jurisdictions without a clear legal status, traders of such currencies were exposed to legal and financial risks.

Citing media reports that pointed to usage of VCs for illicit and illegal activities in several jurisdictions, RBI warned such transactions could subject users to unintentional breach of anti-money laundering or combating the financing of terrorism (AML/CFT) laws.

At present, the Indian banking regulator is examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.

BS Reporter in Mumbai