The apex bank says it has repeatedly cautioned users, holders and traders of virtual currencies (VCs), including bitcoins, regarding various risks associated in dealing with such VCs
The Reserve Bank of India (RBI) has barred banks, micro finance institutions, non-banking finance institutions (NBFCs) and all other entities regulated by it from dealing with bitcoins or have business relations with companies dealing with the same.
The banking regulator has asked the entities having any business relations with such companies to wind down the business relation. The digital token of payment, which is outside the banking system, has imminent risks that the central bank wants to ring fence.
Demonetisation had increased the appetite for cryptocurrency in India. After the government declared 86% of its existing currency as invalid in 2016, there were cases of large orders for bitcoins. But India accounts for only 2% of the global cryptocurrency by market capitalisation.
The apex bank said it has repeatedly cautioned users, holders and traders of virtual currencies (VCs), including bitcoins, regarding various risks associated in dealing with such VCs.
"In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs. Regulated entities which already provide such services shall exit the relationship within a specified time," a statement issued by the RBI stated.
B P Kanungo, deputy governor of RBI, said, "While many central banks are still engaged in the debate, an inter-departmental group has been constituted by the RBI to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency." The report will be submitted by end-June 2018, he added.
The RBI has repeatedly cautioned users, holders and traders of digital currency, and even gone to the extent of calling bitcoins a ponzi scheme. The central bank wants to send a message to people that dealing in VCs doesn't come under its purview.
Explaining its rationale behind the central digital currency, RBI said technological innovations, including virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, the block chain technology that underpins the cryptocurrency will be utilised.
A rating agency in a February 2018 report had said that at this stage, "We think that retail investors would be the first to bear the brunt in the event of a collapse in crypto currencies' market value. We expect rated banks to be largely insulated, given that their direct or indirect exposure to crypto currencies appears to remain limited."
The problem with cryptocurrency is that it has attracted a significant amount of interest but they float around in the financial system independent of the central banks. RBI is concerned that it will infiltrate the traditional financial system by exposing them to a bubble burst.
India has few cryptocurrency exchanges called BtcxIndia, Unocoin, Coinsecure, Zebpay, Koinex and Bitcoin-India. "With the massive surge in the popularity of crypto currencies such as bitcoin, India has also jumped into the market with country's own cryptocurrency called, 'Laxmicoin'. Even launched in 2012, it is now gaining limelight for not so right reasons as desi crypto coins are considered a little dubious, said professor Pradeeptha Sethi, a former banker and expert in financial market infrastructure.
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