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Virtual currencies

This article contains information about the virtual currencies like bitcoins.

"Decentralised Digital Currency” or "Crypto currency" or “Virtual Currency” (VCs) is being used in several parts of the world today. Examples of VCs are Bitcoins, litecoins, bbqcoins, dogecoins etc.

Evolution of Digital currency

Digital Currency has been in the minds of researchers for quite some time. The Cypherpunks, as they were called, led by Timothy May of Intel and Eric Hughes in 1992 tried to develop privacy through crypto logic. Wei Dai in 1998 attempted to create what was called the B-Money, a money that could not be taxed or tracked. Nick Szabo attempted to create Bit-Gold which will be difficult to solve (mine) and so will have value; he tried to create a puzzle of solving cryptographic equation which was further refined by the hands of Satoshi Nakamoto in Bitcoins.

What is a bitcoin?

Bitcoin is a type of digital currency that enables instant payments to anyone. Bitcoin was introduced in 2009.

Bitcoin is based on an open source protocol and is not issued by any central authority. Bitcoin is a peer-to-peer currency. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network.

"BITCOIN" (capitalised), refers to the protocol and transaction network whereas "bitcoin" (lowercase), refers to the currency itself.

Important points about bitcoins

  1. Bitcoin is the first decentralised digital currency.
  2. Bitcoins are digital coins you can send through the Internet.
  3. Bitcoins are transferred directly from person to person via the net without going through a bank or clearing house. (This means that the fees are much lower, you can use them in every country, your account cannot be frozen and there are no prerequisites or arbitrary limits.)
  4. The Bitcoin software is completely open source and anybody can review the code. The supply of bitcoins is regulated by software and the agreement of users of the system and cannot be manipulated by any government, bank, organisation or individual.
  5. Bitcoin uses public-key cryptography, peer-to-peer networking, and proof-of-work to process and verify payments.
  6. Bitcoins are sent (or signed over) from one address to another with each user potentially having many, many addresses. Each payment transaction is broadcast to the network and included in the block chain so that the included bitcoins cannot be spent twice. After an hour or two, each transaction is locked in time by the massive amount of processing power that continues to extend the block chain. (The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value. Blockchains are an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. Bitcoin block chain is a database which holds information about all transactions.)

Reserve Bank of India's stand on Virtual Currencies

Prohibition on dealing in Virtual Currencies (VCs)

Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, 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 from April 6, 2018, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.

Regulated entities which already provide such services shall exit the relationship within three months from the date of the RBI circular ie. April 6, 2018.

RBI cautions public on Virtual Currencies

The Reserve Bank of India points out that users, holders and traders of Virtual Currencies (VCs), including Bitcoins, expose themselves to potential financial, operational, legal, customer protection and security related risks.

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. As such, they may pose several risks to their users, including the following:

  • 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 etc. 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.
  • 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 / charge backs etc.
  • 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 is 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.
  • There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. 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.

 

Sources :

  1. RBI press release
  2. RBI Bulletin
3.00970873786
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