Mumbai: The Reserve Bank of India (RBI) on Tuesday warned the public against the use of virtual currencies such as Bitcoin, saying use of such instruments for financial transactions poses significant risks to the users, holders and traders.

There are potential financial, operational, legal, customer protection and security-related risks that they are exposing themselves to, RBI said in a statement.

The apex bank has been looking at the developments relating to certain electronic records claimed to be decentralized digital currency or virtual currency, such as Bitcoin, Litecoin, BBQcoin and Dogecoin, and their use or trading in the country and the various media reports in this regard, RBI said.

RBI is examining the issues associated with the use, holding and trading of these so-called currencies under existing legal and regulatory framework of the country, including foreign exchange and payment systems laws and regulations, it said.

The creation, trading or usage of virtual currencies as a medium for payment are not authorized by any central bank or monetary authority, RBI said. “No regulatory approvals, registration or authorization is stated to have been obtained by the entities concerned for carrying on such activities," RBI said in its statement.

Bitcoins are fast gaining favour in India, Mint reported on 28 November. According to SourceForge, an online platform that connects consumers to open-source projects such as Bitcoin and facilitates downloads, there have been 35,648 downloads in India since the launch of Bitcoins on 9 November 2008, the report said, adding there are an estimated two or three users for every download.

Of these, close to 70%, or 24,723 downloads, took place in 2013. In October alone, there were 2,067 downloads of Bitcoin, moving India’s ranking one place up to 16, the report said.

Detailing the risks in such currencies, RBI said that since virtual currencies are stored in digital media called electronic wallets, they are prone to losses arising out of hacking, loss of password, compromise of access credentials or malware attack.

“Since they are not created by or traded through any authorized central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs (virtual currencies) held in them," RBI said.

Also, payments by virtual currencies take place on a peer-to-peer basis without an authorized central agency which regulates such payments, which is risky, RBI said.

There is no underlying or backing of any asset for virtual currencies, RBI said. “As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past," RBI said. “Thus, the users are exposed to potential losses on account of such volatility in value."

RBI also said that virtual currencies such as Bitcoins are being traded on exchange platforms set up in various jurisdictions whose “legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks".

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