On the 24th of December 2013, RBI gave an advisory on Bitcoins.
The caution was meant for the users, holders and traders of Virtual Coins (VCs) including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to.
The advisory refers to the virtual currencies as “Electronic records claimed to be decentralized digital currency or virtual currency”.
The advisory goes on to state that “trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority.
It adds “No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities”.
It is in the light of the above that the Advisory states that they may pose several risks to the users.
The advisory recognizes the following risks:
1.Loss of VCs may arise due to hacking, loss of password, compromise of access credentials, malware etc.
2.There is no established framework for redressal of customer problems, disputes, charge backs etc.
3.Losses may arise on account of volatility of value.
4.Trading of VCs on platforms on websites operating in different jurisdictions poses legal and financial risks.
5.Absence of information on counter parties could subject users to unintentional breaches of anti- money laundering laws.
The advisory also states that RBI 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.
It is clear from the above that RBI has been extremely careful in releasing the advisory. It has not provided any mandate but has done its duty to the public by highlighting the risks inherent in the use of VCs. These risks are known to an informed VC user but were required from the point of view of the ordinary man on the street.
Hence the Bitcoin community need not be unduly worried about the advisory.
However RBI has indicated that it is still examining the issue. This could mean that at some point of time in future RBI may come out with a more detailed mandatory guideline if it deems fit.
This possibility will hang on the heads of all Bitcoin operators as the proverbial Sword of Damocles.
If Bitcoin operators need to commit on any investments on Bitcoin, then there is need for better clarity since business cannot thrive on a future full of uncertainty.
The problem is complicated by the fact that the RBI advisory has already been mis-interpreted by most people including some of the Bitcoin operators themselves. All the major news papers highlighted the fact that “Bitcoins operators shut shop after RBI advisory”. This automatically implied that RBI’s advise was to “Shut shop”. It is ironic that the panic actually spread because some of the Bitcoin operators stated that they are “Suspending” their operations following the RBI’s advisory. This was interpreted by the public as “Admission that there was some thing wrong”.
During the last Bitcoin Conference on December 15th at Bangalore, I had clearly made out that RBI advisory was expected and the advisory was on the lines then indicated. From 15th December to 24th December there was ample time for the operators to take stock of their operations. In fact if there was a need to temporarily shut shop, it was immediately after the conference.
As one can see, RBI advisory did not warrant closure of business. At best it warranted the operators to review their business policies to make their operations compliant with the expectations.
When the Bitcoin operators revealed a nervousness and responded with their own knee jerk reaction to the RBI advisory, it was natural for the Enforcement Directorate to presume that there must be some thing wrong and they need to move in before it is too late. In a way the hasty closures actually must have prompted the ED to act immediately.
Anyway the bygones are bygones and the clock cannot be turned back. It is now time to look to the future and both RBI and ED on one side and the Bitcoin operators on the other side should sit and discuss how Bitcoin (and all other VCs) as a system need to be looked at. If the risks of money laundering in Bitcoins is not different from the use of printed notes, RBI need to consider if at all there is a need to throttle what is essentially freedom of the citizen to create and use his own system of payment settlement.
If a citizen decides to give his friend Idlies and Dosas so that he purchases a film ticket for him, why should the regulator be concerned about this barter system? Bitcoin after all is a community arrangement to use a “Specified Electronic Record” as the basis for settlement of payment.
If Bitcoin is being perceived as a “Currency” , then Government should think … What is there in Bitcoin which is not there in Indian Rupees or US Dollars?
If the public are voluntarily giving it a status of a “Peer to Peer Currency”, then
Is it right for the regulator to infringe on his freedom of choice of a payment system?
.. It is time to ponder