Can RBI ignore the parallel Bitcoin economy

The six member monetary policy committee (MPC), headed RBI governor Urjit Patel announced the policy in view of the moderation in price trends that have persisted long enough to warrant lower loan costs.

New Delhi, March 3: Bitcoin and other virtual currencies are all the rage in FinTech. They could potentially transform the global commerce in the coming years. Users are adopting them enormously each day and the value of trade in these currencies are witnessing exceptional growth.

All over the world, authorities are working out to materialise a carefully-crafted regulation to foster Bitcoin growth. In India, even after the demonetisation drive, Bitcoin trade is spiking. While the Reserve Bank of India (RBI) continues to shy away from recognising and regulating virtual currencies in the country.

On February 1, the RBI issued another cautionary statement, on the background of an earlier one issued in December 2013. This statement has warned its users of a risk they are possibly aware of — that as the RBI does not regulate and has not licensed any virtual currencies in India, anyone using them does so at their own risk.

On March 1, RBI Deputy Governor R. Gandhi raised his concerns over virtual currencies, saying they pose potential financial, legal, customer protection and security-related risks.

The central bank seems to be wrapping itself from the consequence of these currencies remaining unregulated. Their use continues to grow exponentially across the world, including in India.

As of an August 2016 (pre-demonetisation) estimate, the number of Bitcoin (the most prominent of several virtual currencies) users in India stood at 50,000 which also showed growth. India now also has a large number of prominent Bitcoin exchanges such as BTCXIndia, Coinsecure, Unocoin and Zebpay. In a world-wide estimation, Bitcoin users alone could breach five million by 2019.

Red flag from the RBI

The recent red flag from the RBI may well have been prompted by the recent hike in the price of Bitcoin on Indian Bitcoin exchanges after demonetisation. Bitcoin has become a freely tradable currency and thus become more accepted. It has its own exchanges (including in India) where users can sign up and speculate, buy and sell Bitcoins for other currencies.

After the cash ban, Bitcoin was quoted to be inflated 20-25 percent over its actual cost. As of March 2, Bitcoin was trading at Rs 90,000 to a single Bitcoin. In October 2016, this value was Rs 40,000 to a Bitcoin.

The question that arises then is how long can the RBI afford to adopt a hands-off approach to virtual currencies when regulators elsewhere are adopting proactive measures?

The Reserve Bank of India’s research wing, the Institute for Development & Research in Banking Technology, issued a white paper on the applications for blockchain technology in the banking and financial sectors in India in January 2017. This acknowledged prominence of virtual currencies but steers towards the underlying distributed ledger (blockchain) technology, rather than virtual currency regulation.

A large number of countries in India’s own neighbourhood, have either adopted or are close to adopting virtual currency regulation in some form or the other. These include China, Russia, Singapore and the Philippines, which issued guidelines for virtual currency exchanges during January, this year.

Interestingly, the precursor to regulation in a number of these countries was warnings similar to those issued by the RBI. These warnings largely came around 2013, at a time when the understanding of the technology and the use of virtual currencies was much lesser than it is today.

In 2017, when users, trading and payments in these currencies are developing and maturing faster than ever, the warn-watch-wait approach simply will not work. There are a number of downsides to not bringing in regulation when virtual currency use in India is still modest. Prominent among these is that regulation which kicks in when products and technologies have become systemic will invariably cause friction between regulators on the one hand, and businesses and users on the other, requiring stakeholders to make slow and possibly expensive changes to the way they transact. Another issue is the key role regulation plays in consumer awareness and security. While the RBI may sleep soundly having issued its caveat emptor, given the attractive investment opportunity and ease of use and access virtual currencies offer, users are likely to throw caution to the wind and invest anyway.

Another issue is the key role regulation plays in consumer awareness and security. While the RBI may sleep soundly having issued its caveat emptor, given the attractive investment opportunity and ease of use and access virtual currencies offer, users are likely to throw caution to the wind and invest anyway.

More importantly, the jury is still out on whether virtual currencies can be used to pseudonymously finance crime, including terrorism, and given the sensitive security scenario in India, it is important for the government to understand, and for the law to control, who can buy them and what they can do with them. As transactions grow, so will the chances and potential for virtual currency-related fraud.

Legal scholars Jack Goldsmith and Timothy Wu have said ‘government regulation works by cost and bother, not by hermetic seal’, which appears to be the line the RBI is taking on virtual currencies. With emerging technologies, however, especially those as radical as virtual currencies, governments are increasingly learning that the cost and bother of reactive regulation can be substantially greater than proactive regulation.

 If the Indian government is serious about its cashless drive, it will have to consider virtual currencies as an integral part of the panacea being touted for our archaic economy. It is up to the government and the RBI to lead the way by bringing forward-looking regulation for virtual currencies sooner rather than later because there is already much catching-up to do.