RBI Cautions Users of Virtual Currencies(Bitcoin) against Risks
Bitcoin is a decentralized digital currency, they are digital coins that can be sent through the internet. The company claims that Bitcoins has number of advantages over the other alternatives. Using Bitcoins money is directly transferred from a person to another, which means no bank is involved in between. This further means lower cost of transfer and Bitcoins can be used in any country, user’s account cannot be frozen, there are no prerequisites or arbitrary limits.
However, authorities of India does not like this concept at all. Several Indian Bitcoin exchanges have suspended operations following a warning from the Reserve Bank of India, which is concerned on digital currencies. The Reserve Bank of India has today cautioned the users, holders and traders of Virtual currencies, including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to.
RBI says, the creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorized by any central bank or monetary authority. No regulatory approvals, registration or authorization 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, including the following:
VCs 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 VCs held in them.
Payments by VCs, such as Bitcoins, 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 / charge backs etc.
There is no underlying or backing of any asset for VCs. 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.
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 counter-parties 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.
Bitcoin came into existence in 2009, and the current number of Bitcoin units generated so far is about 12 million. However, India is not the only country to suspend the use of Bitcoins, as Thailand and China did the same. RBI is examining the issues on the usage of the virtual currency under the extant legal and regulatory framework of the country.