Sebi, RBI engage in turf war over Bitcoin regulation

RBI proposes to allow trading in bitcoin as commodity derivative on a digital platform

The government's proposal to regulate Bitcoin crypto currency has sparked a regulatory turf war between Securities and Exchange Board of India (Sebi) and Reserve Bank of India (RBI). According to sources, the central bank is of the opinion that bitcoin is a security rather than currency and should be regulated by Sebi. The proposal has not gone down well with the latter which opposes the suggestion.

Last week, the finance ministry called for a meeting of all stakeholders to discuss the regulatory framework of the virtual currency. During the meeting, RBI proposed to allow trading in bitcoin on the lines of trading in commodity derivatives such as gold or silver. It also recommended Sebi to ensure that bitcoin should not be used for any illegal activities like money laundering, terror funding while regulation.

Sebi expressed displeasure over RBI's proposal. "It (bitcoin) cannot be classified as commodity derivatives as per extant legal provisions," said a regulatory official.

Keeping the same view, legal experts also believe that bitcoin cannot be categorised as commodity.

"Commodities are usually well-known items and maintain accountability. How will bitcoin, which has no existence, fit in the category? The government needs to come out with the legal definition and terms before putting into any category," says RS Loona, managing partner, Dhaval Vussonji Alliance.

According to him, for Sebi, the question is of setting the whole mechanism to deal with the virtual world. The mechanism should be foolproofed and well-versed with the environment.

Crypto-currency is a digital currency which uses encryption techniques to regulate generation of units and verify transfer of funds, operating independently of a central bank. Global market capitalisation for virtual currencies is about $40 billion. Bitcoin trades at around $1,600 and is volatile. In India, Bitcoin is traded at around Rs 1 lakh a unit.

The argument - whether the virtual currencies should be banned or regulated - has been on for quite some time. Earlier this year, finance ministry constituted a committee to examine existing regulatory and legal framework on the issue. The inter-disciplinary committee has been asked to submit its report within three months. It is examining the present status of virtual currencies, both in India and globally.

Meanwhile, a public interest litigation (PIL) has also been filed in Supreme Court against the government and concerned ministry over its usage and increasing popularity in business deals. The petition was heard on July 14, where SC directed the central bank to look into the complaint seeking its intervention to take urgent steps for restraining the sale and purchase of crypto currencies like Bitcoin.

RBI has time and again issued cautionary note about the potential financial, operational, legal, customer protection and security risks to the users, holders and traders of virtual currencies.

On February 1, central bank said that it has not authorised any entity or company to operate virtual currency schemes or deal with bitcoin or any virtual currency. "Any user, holder, investor or trader dealing with virtual currencies is doing it at their own risk," it had said in a press release.

This was not the first time. In December 2013, it had issued the same note. After the RBI release, the enforcement directorate (ED) raided the premises of two entities who were providing a platform to trade in the illegal currency.