RBI Clamps Down on Bitcoin Virtual Currency

A number of bitcoin operators in India have begun suspending their businesses following a warning from the Reserve Bank of India (RBI) against use of such virtual currencies due to potential money laundering and cyber security risks.

While the apex bank is yet to come out with a clear regulatory framework for the bitcoin, the currency which has been gaining across the world over the past few months, it has issued an advisory cautioning general public against use of virtual currencies.

Within days of this advisory issued on December 24, a number of entities offering bitcoin services have suspended their operations, temporarily or indefinitely, while websites of a few others have gone down.

However, some other entities continue to run their operations of offering bitcoin exchange services for rupee and other currencies.

Bitcoin is a virtual currency that can be generated through complex computer software systems with solutions shared on a network, although the process is complex and such 'mining' can be done only on very powerful servers.

Hardly three years into existence, bitcoin has already become the world's most expensive currency and its per unit value recently soared past $1,000, or about Rs. 63,000. Its prices, however, have now slipped below Rs. 50,000.

There was a phenomenal surge in the exchange rate for bitcoin from little over $200 to well past $1,000 during November, but there has been an extreme volatility since then and the RBI's warning has further added to its woes in India.

One of the bitcoin operators in India, Buysellbitco.in, has posted its website, "Post the RBI circular, we are suspending buy and sell operations until we can outline a clearer framework with which to work."

"This is being done to protect the interest of our customers and in no way is a reflection of Bitcoin's true potential or price."

Another bitcoin trading entity, INRBTC, also said, "In light of RBI's notice, services of INRBTC.com are being suspended indefinitely."

Explaining its decision, INRBTC said that the Reserve Bank has stated that users of virtual currencies are exposed to both legal and financial risks.

"Further it (RBI) states that absence of information of counterparties could subject the users to unintentional breaches of Anti-Money laundering and combating the financing of terrorism (AML/CFT) laws," it added.

"The only option left now is suspend the services until further arrangements can be made." It, however, also said that all trades executed till December 26, 2013 will be processed completely.

"All pending orders will be cancelled and the deposits on those orders will be refunded 100 per cent to the users," it said. Many other websites offering bitcoin services in India have gone down, although a few continue to operate as of now despite increasing regulatory glare on bitcoins globally.

While authorities and experts are becoming worried about its potential money laundering risks, concerns have also been raised about this new phenomenon snowballing into an 'e-ponzi' or an electronic version of investor fraud, given the growing promotion of bitcoin as investments without any enabling regulations for them.

While the US has declared that all prevailing money laundering laws would apply to bitcoins, China has asked its banks and other financial institutions not to deal in bitcoins and the public has been asked to do so at their own risk.

Bitcoin came into existence in 2009 and the current number of bitcoin units generated so far stands at about 12 million. However, only a small number of bitcoins are being used for real commercial and retail purposes and a majority of transactions are happening for speculative investments.

Adding to the challenges before the regulators, this e-currency, or virtual currency, is already being accepted by some online retailers in countries like the US, China and a few others, for various purposes including pizza delivery.

While regulators are tight-lipped about their plan of action, a senior official said that one possible way forward can be following the US, where authorities have decided to subject bitcoins to money laundering rules applicable to all other financial transactions in the country.