RBI's cryptocurrency diktat: All you need to know

The central bank is exploring the idea of introducing a 'fiat digital currency' that it will control and regulate.

 |  5-minute read |   06-04-2018
  • ---
    Total Shares

It is the end of the road – at least for now – for millions of crypto enthusiasts in the country. After months of warning investors against trading in cryptocurrencies that it considers "illegal tender", the Reserve Bank of India (RBI), on April 6, barred all "regulated entities" like banks and non-banking entities from providing services to any individual or business dealing in virtual currencies.

The move is set to impact nearly 50 lakh Indians who have cryptocurrency investments. It is worth noting that Bitcoin investments in India are pegged at nearly $2billion.

Speaking to the media, deputy governor of the RBI, BP Kanungo, said that "virtual currencies, also variously referred to as cryptocurrencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others... In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the RBI shall not deal with or provide services to any individual or business entities dealing with or settling virtual currencies".

Though the directive has come into effect, it is important to note that banks and non-banking entities have been given three months to conclude their dealings with firms that deal in digital currency.

Fencing against risk

The move has been taken to protect banks and non-banking entities from crypto-fraud that poses a serious threat to the stability of India's economy. 

In the statement, the RBI deputy governor added that "digital tokens issued by private parties are getting international attention for quite some time for their speculative value".

Internationally, while regulatory responses to such tokens are not uniform, it is universally felt that they can seriously undermine the anti-money laundering/FATF (Financial Action Task Force) framework, and adversely impact market integrity and capital control.

And if they grow beyond a size, they can endanger financial stability.


Why the move

The move was in the offing as the RBI had already clarified its stance on cryptocurrency. Even finance minister Arun Jaitley, in his last full Budget, made it clear that the Indian government does not recognise cryptocurrencies such as Bitcoin, Ripple and Etherium as "legal tender" and will take all measures to eliminate their use for illegitimate transactions.

"The RBI has cautioned on at least three occasions members of the public and users of virtual currency regarding risks they are exposing themselves to through these cryptocurrencies. We have now decided to fence RBI-regulated entities from the risk of dealing with entities associated with virtual currencies. They are required to stop having a business relationship with entities dealing with virtual currencies forthwith and unwind the existing relationship within three months."

What does this mean?

Technically, neither the RBI nor the government has banned digital currencies. Unlike China, which enforced a blanket ban on trading and holding cryptocurrencies, the RBI's latest step is just a clever way of stopping people from continuing to increase investments in cryptocurrencies by simply barring banks from facilitating the transfer of money to Indian crypto exchanges like Zebpay, Unicoin and Coindelta. 

Once the banks close their business with these exchanges, the move will also affect those looking to withdraw money by selling their existing crypto holdings. 

Apart from this, none of the currencies or exchanges have been banned in the country, and many of the bigger ones would likely continue existing in the capacity of cryptocurrency wallets. 


What about blockchain

Though fatal for crypto trading in the country, the diktat comes as no threat to the technology that powers cryptocurrencies – blockchain. 

Blockchains grew in popularity in 2017, and are expected to take centrestage in the coming years. They are decentralised digital ledgers that serve as the backbone for cryptocurrencies. Working as a distributed public ledger, blockchains provide a decentralised and transparent method for transactions, while maintaining a high level of security.

Experts predict that in the future, their real value will be seen in more than just digital currency. Recent reports peg that blockchains’ influence will expand to the ever-connected world of the Internet of Things (IoT), transforming it forever. 

Is there a bigger game?

The directive, though seemingly harsh, is not the first of its kind. Regulatory bodies in countries like China, South Korea and Canada have, during the past year-and-a-half, imposed a partial or complete ban on cryptocurrencies. 

However, RBI's latest attempts to curb the flow of decentralised digital tokens such as Bitcoin appear to be slightly complicated. Part of the reason why the RBI has not gone ahead and put a blanket ban on cryptocurrencies appears to be its interest in controlling the space, rather than killing it. 

As opposed to the decentralised private digital tokens used for purchase and trade, the RBI is mulling over bringing a "fiat digital currency".  

"Several central banks are debating the possibility of introducing a fiat digital currency as opposed to the private digital tokens. These are issued by the central bank, are considered the liability of the central bank... They will be in circulation in addition to the paper currency and also holds the promise of reducing the cost of printing of notes."

The idea of the RBI proposed "fiat digital currency" flies in the face of the core idea of blockchain based cryptocurrencies which by their very nature are supposed to be decentralised and not controlled by regulatory bodies. As such, if nothing, the latest statement only exposes how poorly the RBI and Modi government understands cryptocurrencies.

Also read: Salman Khan gets 5 years in jail: What Bollywood stands to lose


Sushant Talwar Sushant Talwar @sushanttalwar

Tech journalist, DailyO

Like DailyO Facebook page to know what's trending.