Indian central bank cautions users of virtual currency..a monopoly worried?

It is all so ironical isn’t it?

On one hand the Indian central bank is pushing digital payments like never before:

Further, banks are urged to encourage their constituents to sustain the movement towards digitisation of payments and switching over of payments from cash mode to non-cash mode.

On the other it is asking to stop using virtual currencies. In a press release yesterday it said:

The Reserve Bank of India had cautioned the users, holders and traders of Virtual Currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to, vide its press release dated December 24, 2013.

The Reserve Bank of India advises that it has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.

Infact, it is the Indian central bank itself which has given rise to increase in these VCs. Any threat to people’s money leads them to search for alternatives and VC has emerged as one such alternative. The Cyprus crisis showed this as well.


The central bank had warned against using these virtual currencies earlier in 2013 as well but that time things were different. It was not pushing digital payments. The war on cash had not begun and there was little idea on what was about to happen in few years.

In 2013, RBI’s notice has more explanations against VCs:

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.

The Reserve Bank has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.

This all reads so laughable now.

In a physical wallet they want currency which is printed by the duo of government and central bank. In digital wallet, where currency can be generated by individuals they see security concerns like hacking etc. Aren’t these concerns there for other digital wallets supported by the central bank as well?

Also this point of virtual currency not being backed by any asset is such an empty statement. What is asset backing of the digital payment supported by the central bank? The answer could be well it is backed by physical note issued by the central bank, But then the physical note in turn is not backed by anything at all. It is just fiat currency after all.

Central banks clearly have a challenge at hand.

Earlier both governments and central banks ensured all currency related activity can only be done by them. Thus RBI Act Section 22 says:

22. Right to issue bank notes.

(1) The Bank shall have the sole right to issue bank notes in 1 [India], and may, for a period which shall be fixed by the 2 [Central Government] on the recommendation of the Central Board, issue currency notes of the Government of India supplied to it by the 3 [Central Government], and the provisions of this Act applicable to bank notes shall, unless a contrary intention appears, apply to all currency notes of the Government of India issued either by the 4 [Central Government] or by the Bank in like manner as if such currency notes were bank notes, and references in this Act to bank notes shall be construed accordingly.

(2) On and from the date on which this Chapter comes into force the 5 [Central Government] shall not issue any currency notes.

In other central bank acts, there is even a penalty in case people are found printing their own currency. In case of RBI, we do not have any such penalty which is strange (though I think there was one earlier).

Now, with digital currency and peer to peer technology the boundaries get murkier. How does the central bank really ban players who produce these digital currencies other than these notices to people?

Ironically, on the one hand government/central bank trying to tighten noose using digital technology but on the other they are being threatened by these  VCs as well. I mean how will government/central banks show their power if they loose the really tight control over money?



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