RBI bars regulated entities from dealing in virtual currencies

RBI has asked all regulated entities to unwind their positions with dealers in virtual currencies within three months.

RBI deputy governor BP Kanungo, speaking at a media conference, said the central bank has decided to promote the use of blockchain – a public ledger that serves as the backbone of Bitcoin – in financial services for strengthening transparency and improving inclusion.

“If they (cryptocurrencies) grow beyond a critical size they can endanger financial stability,” said Kanungo.

RBI had earlier thrice warned the public to be cautious while dealing with cryptocurrencies that are unregulated.

“Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. 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,” RBI had stated in an earlier warning.

“While many central banks are still engaged in the debate, an inter-departmental group has been constituted by the Reserve Bank 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,” it added.

Governments around the world are stepping up scrutiny of virtual currencies amidst skyrocketing valuations over the past one year that triggered worries that currencies like Bitcoin could facilitate everything from money laundering to tax evasion and fraud (See: The path of ransomware payments exposed). 

Bitcoin scaled a peak of almost $20,000 in early December last year, since then its valuations have come down, which pulled down rival cryptocurrencies as well. With losses mounting in the start of 2018, several lenders have decided to stop lending to Bitcoin dealers.

Countries like China, Japan and South Korea, which were earlier encouraging virtual currencies, have since put in place a number of regulations.

Finance minister Arun Jaitley had already said that the Indian government doesn't consider cryptocurrencies as legal tender and will take all measures to eliminate payments using them.

While investors will no longer be able to buy Bitcoins through their bank accounts or digital wallets, Reserve Bank of India is in the process of introducing its own digital currency in line with the policy followed by central banks around the world.

“These are issued by the central bank and are considered the liability of the central bank,” Kanungo said. “They will be in circulation in addition to the paper currency that we have. It also holds the promise of reducing the cost of printing notes.”

RBI has constituted an interdepartmental committee that will submit a report on the feasibility of a fiat digital currency. The committee will submit its report by June-end.