RBI Cautions on Risks of Trading in Virtual Currencies including Bitcoins

December 06, 2017

In a press release issued by the Reserve Bank of India (RBI) yesterday, the RBI has cautioned the general public on the risks of Virtual Currencies (VCs) including Bitcoins. The press release cautioned users, holders and traders of VCs including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.

In its press release of December 2013, the RBI had stated that it has been looking at the developments relating to certain electronic records claimed to be “Decentralized Digital Currency” or “Virtual Currency” (VCs), such as, Bitcoins, litecoins, bbqcoins, dogecoins etc., their usage or trading in the country and the various media reports in this regard.

Trading of VCs including Bitcoins not authorized by Central Bank- In this context, the RBI clarified that creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any Central Bank or monetary authority and no regulatory approvals, registration or authorisation have been obtained by the entities concerned for carrying on such activities.

RBI on Risks of Trading in VCs including Bitcoins

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 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.

The Reserve Bank has also stated that it is presently 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.

RBI has not given any license to operate such schemes like Bitcoin– Here it would be relevant to mention that vide its press release dated February 1, 2017, RBI had also clarified that it has not given any license/authorisation to any entity/company to operate such schemes or deal with Bitcoin or any VC.

RBI’s notification cautioning users of VCs including Bitcoins comes in the wake of significant spurt witnessed in the valuation of many VCs particularly Bitcoins in the country. According to Forbes Bitcoin plunged above $12,000 today reaching its latest record.

The RBI’s press release is an essential one as it clarifies that a user can invest in VCs at their own risk and no monetary authority can be held liable for the same.

About the Author

Shilpi Sharan

- Shilpi Sharan is the Editor at Vakilno1.com - an Advocate with extensive knowledge in myriad fields of Law. She has a flair of writing and has legal publications in national and international law magazines to her credit. She focuses on legal research and aims at raising public awareness of laws in India.