The Reserve Bank of India (RBI) has clamped down on virtual currencies, including Bitcoin, directing all entities regulated by the central bank — mainly banks, finance companies and wallets — not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies, joining the global crackdown on trading of virtual coins.
The RBI crackdown came a day after Amit Bhardwaj, the bitcoin entrepreneur who allegedly cheated over 8,000 people to the tune of Rs 2,000 crore was arrested from the Delhi Airport on Wednesday. “Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately,” the RBI said.
Simultaneously, the RBI has constituted an inter-departmental group to study and provide guidance on the feasibility to introduce a central bank digital currency. The report will be submitted by end-June 2018, RBI said.
“Rapid changes in the landscape of the payments industry along with factors such as emergence of private digital tokens and the rising costs of managing fiat paper/metallic money have led central banks around the world to explore the option of introducing ‘fiat’ digital currencies,” the RBI said. Fiat currency is currency that a government has declared to be legal tender. However, cryptocurrency, or virtual currency like Bitcoin, is not legal tender and not backed by a government.
“Several central banks are debating the possibility of introducing a fiat digital currency. As opposed to private digital tokens, these are issued by a central bank. They constitute liability of the central bank, and they will be in circulation in addition to the paper currency…,” RBI Deputy Governor B P Kanungo said.
The RBI said: “Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.” Technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, virtual currencies raise concerns of consumer protection, market integrity and money laundering, among others, it said.
“We have decided to ring-fence the RBI regulated entities from the risks of dealing with virtual currencies. These operators are required to stop having a business relationship with the entities dealing with virtual currencies forthwith and unwind the existing relationships within three months,” Kanungo said. On the fiat currency that the RBI has proposed, he said having such a currency will also reduce the cost of printing and circulating paper currency.
“We recognise that blockchain technology that lies beneath the virtual currencies has a potential benefit for financial inclusion and enhancing the efficiency of the financial system. We also believe that they should be encouraged to be exploited beneficially for the economy,” Kanungo added.