Virtual currencies – A regulatory conundrum


Dear Editor,

I would like to highlight that the legal status of cryptocurrencies or virtual currencies (VCs) such as bitcoins continues to be debated as it remains unrecognized in India. Unlike the traditional form of currencies issued by government/banking authorities, VCs as per the European Central Bank are issued and usually controlled by their developers, and used and accepted among the members of a specific virtual community, and rely on cryptography for their creation and management.

Trading and transacting in VCs are increasing at an unprecedented rate in this digital age. The question of recognition and regulation of VCs is one that governments across the world have been grappling with, and India is no different. VCs like bitcoins have reportedly been banned in certain countries, while at the same time they have been recognized and regulated in certain other countries. Trading in bitcoins in Bangladesh for instance is a punishable offence, while Japan has recently passed a law regulating bitcoins as a legal form of payment in the country. Even Russia is contemplating regulation of its cryptocurrency market.

As far as India is concerned, VCs have not been recognized by the Reserve Bank of India (RBI), as a “currency”. RBI in the past issued several advisories clarifying that creation, trading or usage of VCs as a medium for payment is not authorized by any central bank or monetary authority in India and entails various risks, but the RBI stopped short of declaring VCs as illegal. The RBI, however, highlighted various risks arising from VCs and referred to several media reports of the usage of VCs, including bitcoins, for illicit and illegal activities in several jurisdictions, and that 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 counter-terrorist financing laws.

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