Mumbai, April 5, 2018

RBI directs banks and regulated entities not to deal in or provide services to individuals or businesses dealing in virtual currencies

The Reserve Bank of India (RBI) is considering issuance of its own virtual currency (VC) while instructing financial institutions to refrain from and cut off business relations with private entities that are dealing with virtual currencies .

Several central banks all over the world are debating the introduction of a fiat digital currency as opposed to the private digital tokens, which are growing in popularity, said the RBI. This currency will be issued by the central bank and constitutes the liability of the central bank. Digital currency, if issued, will be in circulation in addition to the paper currency and holds the promise of reducing the cost of printing currencies, said the central bank.

“While many central banks are still engaged in the debate, an inter-departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency,” said the central bank.  The report will be submitted by June-end.

The RBI, however, has frowned upon private cryptocurrencies and ring-fenced regulated financial entities from entities dealing in these digital currencies. The financial entities by the RBI are instructed to stop having a business relationship with entities dealing with virtual currencies forthwith and unwind existing relationship within a period of three months.

“Digital tokens by private currencies have been getting attention worldwide for their speculative value. While regulatory responses to this token currency are not uniform internationally, it is universally felt that they can seriously undermine the AML(Anti-Money Laundering) and FITF ( Financial Inclusion technology Fund) framework, adversely impact the market integrity and capital controls. If they grow beyond a certain size, they can endanger financial stability as well," said B P Kanungo, Deputy Governor, RBI.

Reserve Bank had repeatedly cautioned users, holders and traders of virtual currencies, including bitcoins, regarding various risks associated with dealing with private virtual currencies previously. The central bank, however, acknowledged the potential benefits of the underlying blockchain technology and said that it should be utilised to benefit the economy.

[The Business Standard]