RBI issues warning on Bitcoins, other VCs regarding legal risks involved

The Reserve Bank of India (RBI) on Tuesday called on those trading in Bitcoins and other virtual currencies regarding the risks involved in the same.

The central bank in an official release cautioned users, holders and traders of Virtual Currencies (VCs) including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.

The RBI also clarified that it has not given any licence or authorisation to any entity or company to operate schemes or deal with Bitcoin or any other VC.

However, in its earlier release, Reserve Bank had claimed that 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 and so on. 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.

Further, 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 or charge backs.

Further, 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 has been 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.

Media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions have also surfaced. 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.

Taking this into mind, the RBI reiterated that the creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities, it said.