India: Why RBI Is Wary of Crypto
RegulationBit News Today2 min read
With immediate effect, the Reserve Bank of India has barred all regulated entities from dealing in or providing services for virtual currencies (VCs). In its statement, the central bank announced that due to related risks, regulated institutions are barred from maintaining accounts, trading, settling, registering, clearing, offering loans against or taking virtual tokens as collateral, as well as handling fund transfers for virtual currency transactions. Existing business relationships must be exited within three months, RBI Deputy Governor BP Kanungo told reporters.
The RBI's decision comes as regulators worldwide voice rising concerns over the risks posed by cryptocurrencies. Indian officials have stated publicly that the government does not recognize bitcoin as legal tender. Regulators fear that the largely unregulated nature of these tokens makes them vulnerable to undermining AML and FITF frameworks, market integrity, and capital controls. RBI Deputy Governor B. P. Kanungo cautioned that virtual currencies could also jeopardize financial stability if they expand past a certain threshold.
Prior to the issuance of the RBI circular, numerous banks had already halted debit and credit card payments intended for purchasing cryptocurrency. While the RBI's action does not amount to an outright ban, it joins regulators such as those from China, Japan and Canada in putting restrictions in place.
Naveen Surya, chairman of the Payment Council of India, remarked that such ring-fencing served as an indirect way to disable a system. Mukul Shrivastava, a partner in fraud investigation and dispute services at EY India, said barring regulated entities from dealing in digital currencies would protect the broader investing public, particularly individuals unaware of cryptocurrency volatility and mechanics, from potential losses.
The Reserve Bank also noted that it is considering the introduction of its own central bank digital currency. The RBI has formed an inter-departmental team to assess the feasibility and desirability of issuing its own digital currency, with a report expected by June 2018. While many central banks are still engaged in the debate, the RBI sees potential in a digital currency to drive financial inclusion, enhance the efficiency of the financial system, minimize tax evasion and cut the black economy.
Rohas Nagpal, chief blockchain architect, Primechain Technologies, argued that an RBI-backed coin would follow proper know-your-customer (KYC) requirements, without loopholes for tax evasion or criminal activities. The RBI stated that it recognizes the value of blockchain and distributed ledger technology and plans to support their use to boost financial inclusion.
The central bank has previously clarified that it has never granted a license to any business to handle or deal in Bitcoin or any virtual currency.
Although a committee formed the prior year to evaluate potential regulations had not yet released its proposals or findings, the news sparked concerns of a potential total ban on cryptocurrencies. With the RBI's latest circular restricting financial institutions from dealing with crypto entities, industry stakeholders continue to debate whether a definitive stand on regulations is needed instead of pushing transactions to cash.
