After RBI released its advisory cautioning the public and Bitcoin intermediaries about the legal and financial risks, it is reported that many Bitcoin intermediaries have suspended their operations.
The intention of RBI’s advisory was mainly to keep the public alerted that if they invest their hard earned savings in Bitcoins expecting super profits, they may be facing the risk of speculative loss. It also warned the intermediaries about the legal risks arising out of the foreign exchange and anti money laundering loss. It also spoke of the cyber security risk which could result in the hacking of their websites and consequential losses.
During recent days, many new operators had sprung up suddenly to take advantage of the spurt in the popularity of Bitcoin in the recent days and started offering services to buy and sell Bitcoins. These were not “Miners” and had to acquire stocks only from the public. Most of the sellers were from abroad since the holding of Bitcoins in India is not very high.
Excepting a few most operators had no controls either on the information security side or controls for preventing the possible use of their systems for money laundering purpose. It was only right for them to now to show prudence and suspend their operations until they try to make their operations compliant with the known laws.
Users and traders should always remember that Bitcoin is a “Private” arrangement between a set of people who have agreed to exchange services in terms of Bitcoins without any backing of a Government agencies. This community is small compared to the overall population which is otherwise interested in investment in shares or currencies or commodities. As a result the volatility in Bitcoin price is inevitable. Presently the international value of Bitcoin is around $750 but this price is holding for some time. Any speculator should be open to such risks which RBI has called the “Financial Risk”.
The legal risk that RBI has referred to arises due to the possibility of the use of Bitcoins for settlement of any criminal activity such as drug trade etc and also includes Bitcoins stolen by a cyber criminal from a genuine holder.The biggest risk for both users and traders s the possibility of holding a stock which is “tainted”. The taint may come about because the earlier transaction of the commodity could have passed through the hands of a money launderer.
At present Bitcoin does not enjoy the benefit of a “Negotiable Instrument” that can clean out the earlier taint in certain conditions. Hence investors and users are only safe if the Bitcoins are mined within India or bought from other known miners. At present the number of bitcoins mined in India may be near zero. Hence the entire floating stock if any are acquired by some body from abroad. This is equivalent to an “Import” under an OGL. If the purchase is through a reputed exchange the buyer may be relatively safe since he cannot be accused of “bad faith” or “Prior knowledge” of taint if any. If the purchase is from a private person, then the buyer is exposed to the risk of tainted bitcoins being passed on particularly if the buyer cannot identify the seller. Hence a proper KYC (Know your customer) is required to secure such transactions to a reasonable extent.
However, any tainted transaction is liable to be dispossessed if the authorities can prove the taint irrespective of whether the buyer is otherwise accused of any criminal wrong doing. This is the legal risk that RBI is referring to.
As regards the Cyber Security risk, any internet operator should be aware of risks of Phishing, Hacking, Man in the browser attack etc which are already prevalent in the Banking system. RBI is aware that it is not able to even motivate the Bankers to provide adequate security for the internet and mobile transactions despite the resources available and RBI mandate from time to time. Hence the possibility of private Bitcoin intermediaries not providing adequate information security is very real. Good Bitcoin intermediaries who handle an informal exchange system need to have a structured information security system in place to ensure “reasonable Security” for the sensitive personal information that they may handle.
The RBI advisory is therefore well intentioned and needs to be seriously looked at. It may however be noted that RBI has not made any statement equivalent to “Banning” the use of Bitcoins and those operators who understand the Techno Legal security issues and are able to manage them may still continue their operations.
If RBI wants to ban Bitcoins, they need to bring about an amendment to ITA 2008 or to RBI Act/Currency Act/Coinage Act/Payment and Settlement Act.
If RBI however wants to encourage Bitcoins or other forms of Virtual Currencies, an amendment can be made to the Negotiable Instruments Act bringing virtual currencies as a new class of negotiable instruments like Cheques, Bill of Exchange and Promissory notes.
It would be interesting if RBI considers a legislation on virtual currencies which are those forms of assets that have the potential of being used as payment settlement instruments with only a “Peer to Peer Backing”.