While there is no government regulation in India yet regarding cryptocurrencies and blockchain, it is instructive to see what the RBI’s historical stance has been regarding these issues, since the Ministry of Finance will no doubt take their cue from the central bank.

In a press release as far back as 2013, the RBI said:

The Reserve Bank of India has today 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.

The RBI then went on to list these risks and how they might affect the consumers. First and foremost on its list was the fact that virtual currencies are stored in electronic wallets and therefore are prone to losses arising out of hacking, loss of password, compromised access credentials, and malware attacks. Since the virtual currencies don’t have any authorised central registry or agency keeping track of them, any loss will likely be permanent and unrecoverable.

This lack of an authorised central agency, the RBI went on to say, was the source of many of its concerns. Another one of them being the fact that, without an authority backing transactions, there won’t be any established framework for recourse to customer problems, disputes, and wrongful charges. The press release added that virtual currencies have no real assets backing their value, and so the setting of the value of these currencies was a matter a speculation. This speculation, the RBI said, had resulted in significant price volatility in the past and so users are exposed to potential losses due to this volatility.

The central bank also expressed its concern about the fact that the cryptocurrency exchanges on which trades were taking place occupied a grey space legally, and so these platforms also exposed users to legal as well as financial risks.

The RBI said it had taken note of several reports of virtual currencies, including Bitcoin, being used to pay for and finance illicit activities. The press release also said that cryptocurrency transactions could unintentionally breach anti-money-laundering and anti-terrorism funding laws due to the absence of information regarding the parties to the transaction in an anonymous or pseudonymous system.

Over the course of the next four years, the RBI issued two more ‘warnings’ to users, which indicated an unusually high level of interest taken by the central bank in what was a relatively niche financial phenomenon. The central bank’s stance on cryptocurrencies of was in agreement with the policy of the Ministry of Finance. Soon after the RBI issued its warnings, the Finance Ministry also came out with its own statement on the matter, which covered most of the same issues.

The Ministry went a step further and likened investments in cryptocurrencies to Ponzi schemes. Its statement of December 2017 said:

There has been a phenomenal increase in recent times in the price of Virtual ‘Currencies’ (VCs) including Bitcoin, in India and globally. The VCs don’t have any intrinsic value and are not backed by any kind of assets. The price of Bitcoin and other VCs therefore is entirely a matter of mere speculation resulting in spurt and volatility in their prices. There is a real and heightened risk of investment bubble of the type seen in Ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money. Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes.

VCs are stored in digital/electronic format, making them vulnerable to hacking, loss of password, malware attack etc. which may also result in permanent loss of money. As transactions of VCs are encrypted, they are also likely being used to carry out illegal/subversive activities, such as, terror-funding, smuggling, drug trafficking and other money-laundering Acts.

The Ministry also got a lot more pedantic about the issue and said:

VCs are not backed by Government fiat. These are also not legal tender. Hence, VCs are not currencies. These are also being described as ‘coins’. There is however no physical attribute to these coins. Therefore, Virtual ‘Currencies’ (VCs) are neither currencies nor coins.

The Government or Reserve Bank of India has not authorised any VCs as a medium of exchange. Further, the Government or any other regulator in India has not given license to any agency for working as exchange or any other kind of intermediary for any VC. Persons dealing in them must consider these facts and beware of the risks involved in dealing in VCs.

The Government also makes it clear that VCs are not legal tender and such VCs do not have any regulatory permission or protection in India. The investors and other participants therefore deal with these VCs entirely at their risk and should best avoid participating therein.

So, there were three warnings from the central bank and one long-winded dire warning from the Finance Ministry. None of them seemed to have worked, and in 2018 the RBI took the next step and issued the country’s first—and so far, only—binding regulation regarding cryptocurrencies. This came in the form of an outright ban on financial institutions providing services to individuals or businesses engaged in the cryptocurrency business in any way.

Excerpted with permission from ‘From Cowrie To Crypto: Blockchain and the Future of Money’ by TCA Sharad Raghavan, Published by Westland.

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