Mumbai: The Reserve Bank of India (RBI) on Thursday stipulated that its regulated entities such as banks and non-banking financial companies (NBFCs) must have no links to firms or individuals dealing with or settling cryptocurrencies like bitcoin. The directive comes into effect immediately.
“Digital tokens issued by private parties are getting international attention for quite some time for their speculative value. Internationally, while the regulatory responses to these tokens are not uniform, it is universally felt that they can seriously undermine the anti-money laundering/FATF (Financial Action Task Force) framework, adversely impact market integrity and capital control. And if they grow beyond a size they can endanger financial stability as well," said B.P. Kanungo, deputy governor of the RBI.
RBI said that a circular in this regard will be issued.
Those entities that already have relationships with such vendors must unwind them within three months, Kanungo added.
In the past, RBI had issued three warnings starting December 2013 in this regard.
In all of them, the central bank cautioned users, holders and traders of the risks involved in dealing with these currencies.
It also clarified that it had not given any licence or authorization to any entity or company to operate schemes or deals related to cryptocurrencies.
With Thursday’s move, RBI joins regulators such as those from China, Japan and Canada, that have put in place restrictions on the use and trade of cryptocurrencies.
A sharp rise in the value of bitcoin during 2017, one of the most popular cryptocurrencies, had caught the attention of regulators. On 16 March 2018, Mint reported that the increasing popularity of the Unified Payments Interface (UPI) has prompted bitcoin exchanges to adopt and promote this payment option for buying and selling cryptocurrencies.
The increased interest in UPI comes at a time when major banks including Citibank and HDFC Bank Ltd have prohibited the use of debit, credit and prepaid cards for cryptocurrency transactions.
“Finance minister in his budget speech had said that the government does not recognize cryptocurrency as legal tender. Even before the RBI issued this circular, many banks have stopped payments via credit and debit card for buying cryptocurrency. With this circular, RBI has plugged that gap and extended it to all entities such as digital wallets. But I think there is a need to take a definitive stand on cryptocurrencies because such a move may force users to move to cash as a medium for dealing, which can prove counter-intuitive," said N.S. Nappinai, an advocate specializing in cyber law.
RBI has, however, said that it recognizes the importance of blockchain, or distributed ledger technology that lies beneath these virtual currencies.
“(Blockchain technology) has potential benefits for financial inclusion and enhancing the efficiency of the financial system," Kanungo said.
He added that RBI has set-up an inter-departmental group to study and provide guidance on the desirability and feasibility of introducing a central bank digital currency. The group will submit its report by the end of June 2018.
“Rapid changes in the landscape of the payments industry along with factors such as emergence of private digital tokens and the rising costs of managing fiat paper/metallic money, have led central banks around the world to explore the option of introducing fiat digital currencies," RBI said.