India's Central Bank Issues A Warning Against Digital Currencies

The Reserve Bank of India cautions traders about the risks of decentralised digital currency, and targets not just Bitcoin but

Reserve Bank Of India LogoThe Reserve Bank of India yesterday published a warning to Indian traders of digital currencies about the potential financial, legal, customer protection and security risks that they are exposing themselves to by using cryptocurrencies such as Bitcoin.

The Indian Central Bank mentioned in the announcement that it has been looking at the developments relating to a number of “electronic records claimed to be decentralized digital currency”, such as Bitoin, Litecoin, BBQcoin, Dogecoin etc., and their usage or trading in the country and the various media reports about them.

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The Indian warning was expected to follow the one made by the Chinese central bank about Bitcoin at the start of the month. After the Chinese warning from December 5th, many other monetary institutions and regulatory bodies made official statements about the risks and legality of Bitcoin. An updated list of the legal status of the digital currency around the world was compiled by Payment Magnates.

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Dogecoin logo
Dogecoin logo

The mentioning of Dogecoin specifically in the warning as a monitored asset could be seen as a testament to how quickly the central bank reacts to events, considering Dogecoin is a cryptocurrency that was only started as a joke and launched on December 6th, 2013 (more on Dogecoin).

The Reserve Bank of India has also stated that it is presently examining the issues associated with the usage, holding and trading of digital currencies under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.

Since the Indian central bank has taken actions to restrict the ability of Indians to trade FX, and the government also has severe restrictions on the import of gold to the country, which many Indians see as the best way to store value and protect their wealth, it is possible to speculate that the next move will be to ban Bitcoin exchanges, as happened in China, but the price does not seem to be affected as of yet.

The Reserve Bank of India warned in its statement that because “Virtual Currencies” (VCs) are not authorized as a medium of payment by any monetary authority 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 authorized 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 authorized central agency which regulates such payments. As such, there is no established framework for recourse to customer problems/ dispute / 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.
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