Warnings aren’t enough

The Centre can’t afford to procrastinate any further on framing rules to regulate the trading and use of bitcoin and other virtual currencies. Earlier, it could be argued that the users of bitcoin were operating on the fringes and that the limited number of participants, especially in India, made regulatory intervention unnecessary. Not that bitcoin has gone completely unnoticed by the authorities. The Reserve Bank of India has issued three warnings since 2013, with the latest coming last week, cautioning investors about the potential economic, financial, operational, legal, customer protection and security-related risks associated with dealing in such virtual currencies. The banking regulator has also made it clear that it has not authorised any entity to operate schemes dealing with bitcoin or other virtual currencies. This warning is, however, not sufficient to protect the interests of investors lured by the heady run of the currency in recent times. Bitcoin’s value has increased more than 16 times since January this year. Trading has become frenzied ever since bitcoin scaled $10,000 earlier this month, with value up 69 per cent since then.

Given the huge swings in value and the lack of regulatory oversight or sovereign guarantees, bitcoin, ethereum, litecoin and other virtual currencies cannot become an acceptable medium of exchange. However, bitcoin is clearly becoming an acceptable alternative asset class among adventurous investors. The number of traders on exchanges trading bitcoin and other virtual currencies in India has witnessed a big jump over the last year; volumes have also increased significantly. The Centre should not let these exchanges trade in a regulatory vacuum. If there is a payment default on these exchanges, the Centre will be faced with a situation similar to the NSEL scam. These exchanges need to be moved under the Securities and Exchange Board of India’s purview with the market regulator framing rules for investor protection, minimum capital, risk control procedures, transaction fee, disclosure and so on. Also, there is ambiguity regarding the taxation of the gains or losses that investors make by trading on these virtual currencies. This needs to be spelt out clearly so that the Centre does not lose potential revenue. Allowing futures and options on bitcoin and other virtual currencies to trade on the larger exchanges such as BSE and NSE can also be considered. These derivative contracts attract both buyers and sellers, thus checking unhindered price increases. The bitcoin futures on CBOE that has begun trading this week is a case in point.

Another risk posed by unhindered use of VCs in the country is the misuse of these currencies for money-laundering or trafficking of drugs and arms. Entities that enable exchange of local currencies into bitcoin or other virtual currencies should also be monitored by the Enforcement Directorate to ensure that illegal activities are not carried out through this route.

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