We missed this earlier.
In a speech earlier this month, Reserve Bank of India (RBI) deputy governor R Gandhi said that the potential of virtual currencies, such as Bitcoin, is being overstated. “We can see that in these types of solutions for Virtual Currency, there is no central bank or monetary authority. They pose potential financial, operational, legal, customer protection and security related risks,” he said.
This has been the most comprehensive statement the RBI has given over the years on virtual currencies. The RBI has only cautioned users intermittently and opted not to regulate them. Earlier in December 2013, the RBI issued a warning that it will not regulate any Virtual Currency including Bitcoin in India and warned people who were dealing with the currency in India of the risks involved, saying that they’re exposing them to financial, legal, operational and security-related risk.
However, in August 2015, former RBI Governor Raghuram Rajan also mentioned that the apex bank is closely monitoring crypto currencies but has so far not intervened in them. “I would like to say that our philosophy is if it is small then let it develop, let us see how it works and then take a view. That was our attitude towards crypto currencies,” Rajan added.
The deputy governor elaborated on his concerns on virtual currencies:
1. Bitcoins stored in digital methods: Virtual currencies being in digital form, stored in digital and electronic media, are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attacks etc.
MediaNama’s take: In December 2016, Forbes detailed how hackers made millions of dollars by stealing Bitcoin by using phone numbers. This is despite users storing bitcoins offline on hard drives. Incidents such as this do not give the RBI confidence to regulate them.
2. No redressal mechanism: Payments by virtual currencies are on a peer-to-peer basis and hence there is no established framework for recourse to customer problems/disputes/charge backs is feasible.
MediaNama’s take: New payment mechanisms such as the Unified Payments Interface (UPI) are currently struggling with refunds and failed transactions. Confidence in newer payment methods has been shaken after demonetization and usage of cash is on the rise again.
3. Underlying value: There is underlying or backing of any asset for virtual currencies. “Value seems to be a matter of speculation,” Gandhi added. Bitcoins are a digital currency whose value is determined by demand and supply.
MediaNama’s take: Bitcoins are available only in limited numbers. Only 21 million Bitcoins can be generated globally and the last bitcoin will be generated in 2140. However, the value of Bitcoins fluctuates wildly. For example, the value of a Bitcoin was $448 in April 2016. Its current value is around $1246.98. Many buy bitcoins as an investment with the belief that the bitcoin price will rise. Some buy as a hedge against currency devaluation. As such, the underlying value of bitcoins is still speculative.
4. Usage of virtual currencies for illegal activities: “The usage of virtual currencies for illicit and illegal activities has been reported as uncomfortably large,” Gandhi said.
MediaNama’s take: In 2013, the United States’ FBI and DEA took down Silk Road, a darknet marketplace where users could buy and sell illegal drugs through bitcoins. Authorities estimated that Silk Road generated sales of over 9.5 million bitcoins with an estimated value of $1.2 billion. Put this number in perspective, only 21 million bitcoins will exist by 2140.
5. Confidence and anonymity: Gandhi added that confidence and anonymity of transactions of on virtual currencies will be key. “The ‘confidence’ in bitcoins or for that matter any virtual currency based on blockchain or any other technology is also limited to its initial rounds and circles only; the initial rounds are always filled with adventurists and risk seekers,” he added. He pointed out that once that it becomes a mass movement with lots of people coming in, risk-avoiders will get in and more confidence in these systems are needed.
“As regards ‘anonymity’, the blockchain technology apologists say it can be made very difficult to track; they say ‘difficult to track’, and that is not ‘anonymity’. Therefore, it may remain a pipedream that blockchain will eliminate ‘currency’, by ushering in ‘virtual currency’,” the deputy governor added.