Digital Currency in India – Part 1

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India has taken a cautious approach to Digital Currency.  The journey is one of that of cautious rejection and the Reserve Bank of India has a strong position against evolution of digital currency without proper security and legal systems to support.  

RBI advisory and raids:

In a conference in December 2014, RBI Governor had pointed out that Digital currencies had four challenges:

  1. Digital currency does not have provide ‘seigniorage’ to the central banks.  Essentially, the central banks cannot make profits from digital currency.
  2. Digital currency will go through an evolution like the credit and debit cards in the country.
  3. There are security issues that will evolve and new challenges will arise from the advent of digital currency like vulnerability to theft
  4. Technology behind digital currency is still nascent and vulnerable to attacks

In addition, RBI also issued an advisory covering the following points:

  1. There is no central authority who can vouch for the validity of bit coin.
  2. The currency does not belong to any sovereign, and hence does not carry intrinsic value.  Hence the value of digital currency is ‘unspecified’.
  3. There are issues around jurisdiction and arbitration for Digital Currency transactions.
  4. Finally, there are ‘tremendous levels of security issues around Digital Currency without any court for appeal.

Just after this advisory, some of the bitcoin traders either suspended or shutdown their operations.  even as regulators seek clarity on digital currencies and ways to regulate them. The RBI’s worries include taxation, security risks, losses due to the volatility and money laundering. While regulators have not deemed virtual currencies illegal, India’s law enforcement agency, the Enforcement Directorate, raided the offices of a few companies that operate bitcoin trading websites. Reserve Bank of India cracked down on Unocoin trading offices.  The IRS officials have asked to submit the methods used for trading, to prevent Anti Money Laundering amongst other details.  Buysellbitco, one of India’s oldest trading company’s shut down its approx. USD 200,000 per month bitcoin trading business.  

While RBI has not rejected the legality of the digital currency outright, the above advisory and action will apply the brakes on digital currency adoption in India.  In fact, the present RBI Governor has indicated that if all things go well, the adoption of digital currencies in India is 10-15 years away.  In our next blog, we shall see the resurgence of digital currency in India.