Regulating Virtual Currencies in India
The media is abuzz with stories about Bitcoin, one of several virtual currencies. Though the Reserve Bank of India has taken a conservative approach so far, a recent statement suggests that the RBI may be reconsidering its stance.
On February 11, RBI Governor Raghuram Rajan was reported in the Business Standard as saying that India’s central bank is still trying to understand virtual currencies and that “RBI would come out with a more considered view of it.” This was a change from December, when the Bank issued an advisory against Bitcoin.
In India, questions around virtual currencies are no longer on the fringes of the commerce system. Virtual currencies, particularly Bitcoin, have become popular in India for the same reason that they have in the rest of the world: an erosion of confidence in traditional banking systems and paper money. The RBI, like other central banks, is struggling to make sense of their evolution, popularity and outlook.
There are about 70 virtual currencies across the world with a total market valuation of about $15 billion. Of these, Bitcoin, valued at $10 billion, is the largest and most popular.
Bitcoin belongs to the category of cryptocurrency – mathematical algorithm-driven virtual currency whose supply is limited by the algorithm. Unlike currencies in the real world, cryptocurrencies have low transaction costs because they are not backed by government fiat. Bitcoin was created in 2009 by an anonymous developer and in four years, it has become the world’s most expensive currency. Till recently, its per-unit value was $1200 and even though its value has fallen, one Bitcoin is still worth a staggering $670.
Although the precise number of Indians involved in the virtual currency trade is not known, there have been over 30,000 downloads of Bitcoin software in India. According to one estimate, there are over 35,000 Bitcoins worth over $1 billion held by Indians across the country. Currencies such as the Ripple, Litecoin, Mastercoin, Nxt and Doge are also gaining popularity. Indian promoters are even trying to evolve their own models. For instance, the founders of Laxmicoin, an India-focused digital currency in development, are keen to pre-mine some of the coins for distribution to those who cannot mine coins themselves.
Vikram Nakkam, CEO of MadoverCoins, a Bangalore-based Bitcoin trading platform, told CoinDesk, a website that specializes in information related to Bitcoin and other virtual currencies, that introducing the Bitcoin to India has been challenging because “India did not see the recession. So Indians really don’t understand what happens in terms of monetary systems and how our money is being controlled. In Western countries like the US and the UK, people have seen the recession… So they embrace Bitcoin in a different way.” Like in the rest of the world though, virtual currency enthusiasts in India are excited by the novelty of the concept, the potential for high returns, the easy setup and the low transaction costs.
On February 24, 2014, Bitcoins worth millions of dollars held by some Indians vanished due to the collapse of the Japan-based Mt Gox, which was the world’s largest Bitcoin exchange, bringing to light the regulatory issues that virtual currencies face.
The Reserve Bank of India has stated that it is examining the issues associated with virtual currencies under the existing legal and regulatory framework in the country. In a press release on December 24, 2013, the Bank cautioned users, holders and traders of virtual currencies about their risks: vulnerability to cyber crime, lack of an established framework for resolution of customer disputes, volatility, and susceptibility to misuse by money launderers and terrorists.
As reported in Hindu Business Line, an industry player said that the RBI’s advisory came just when the virtual currency business in India was beginning to grow. Following the warning, enforcement authorities raided the country’s largest Bitcoin-trading platform buysellbitco.in. Several Bitcoin operators have begun suspending their businesses. Laxmicoin’s launch too was delayed due to “regulatory clarifications.”
Many believe that virtual currencies will thrive even in the face of the regulatory challenges that beset them. Just four days after the collapse of the Mt Gox, Highkart.com, an online shop selling over 150 products, became India’s first e-commerce firm to accept Bitcoin as the only payment option. In a statement, the company said, “For people who own Bitcoins, it has become more of a saving rather than them putting them into some use, as in India; there was no other options till date. We wanted people to use Bitcoin in their day to day lives, thus helping them to be less dependent on the fiat currency which is fast depreciating.” Benson and Jincy Samuel, the founders of CoinSecure.in, told the Economic Times, "Despite the RBI warning and the ambiguity on guidelines, PCI Riser cards, which are used for tackling Bitcoin algorithms are almost sold out in India."
Central banks across the world have demonstrated a remarkable ambivalence towards virtual currency. Vice-Chair of the U.S. Federal Reserve Janet Yellen was quoted in Business Insider as saying, “Bitcoin is a payment innovation that's taking place outside the banking industry. To the best of my knowledge there's no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn't have authority to supervise or regulate Bitcoin in anyway.” China has stopped financial institutions from trading in Bitcoin without making it illegal while Singapore and Norway have left the decision to businesses. Nakkam told CFO India, India’s largest B2B magazine aimed at the CFO community, “Regulators across the globe are still struggling to understand this concept and have been unable to keep pace.”
The RBI too is likely to take its time in clarifying the situation around virtual currencies. Rajan has expressed concern about volatility, saying, “I do worry a little bit when the underlying (BitCoin) fluctuates tremendously… And to the extent that a currency is a target of speculation as opposed to primarily a means of exchange, it does create some concerns for the user.”
According to CFO India, if central banks and governments accept virtual currency, they will flourish. Subir Gokarn, the former Deputy Governor of the RBI told CFO India, “The key will be if Bitcoin is accepted for government transactions such as paying taxes. This would be the end of monetary authority over national currency.” It is for exactly this reason though that in the short term, central banks are unlikely to make virtual currency legal.
While the exact direction that virtual currencies will take in India remains to be seen, their emergence has raised interesting questions about whether virtual currencies are the order of the future and whether the resistance they are facing is just the usual resistance that revolutionary new dispensations face from old dispensations. Monaz Noble, the CFO of Novartis India told CFO India, “Virtual currencies are here at our doorsteps if not tomorrow, then the day after.”