RBI's move unnerves cryptocurrency business in India
16 April 2018
The Reserve Bank of India’s move to regulate the influx of parallel currencies seems to have unnerved virtual currency trade and stakeholders now rue the fact that they were not consulted before RBI took its decision.(See: RBI bars regulated entities from dealing in virtual currencies).
While the crash of Bitcoin wallet could be attributed mainly to the weakness of the instrument that has no collateral backing or government guarantee, traders are trying to attribute it to RBI move to expose crypto-market weaknesses before investors.
What has hurt the Bitcoin maniacs more is the tax authorities bringing the trade in virtual currencies under its lens and the Reserve Bank barring banks from lending to virtual currency trade and warning investors of the pitfall in investing in unregulated financial instruments.
“Reserve Bank has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs.
Regulated entities which already provide such services shall exit the relationship within a specified time. A circular in this regard is being issued separately,” RBI had stated in a report on development and regulation.
At the same time, RBI has pointed to the need for technological innovations, including those underlying virtual currencies, which have the potential to improve the efficiency and inclusiveness of the financial system.
“However, virtual currencies (VCs), also variously referred to as cryptocurrencies and cryptoassets, raise concerns of consumer protection, market integrity and money laundering, among others,” RBI noted.
“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. 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. The report will be submitted by end-June 2018,” the report added.
RBI’s announcement on cryptocurrency has not only unnerved traders and the virtual currency exchanges but also weaned away investors who were in a state of loss.
"This unprecedented move by the RBI has stirred the market and impacted the industry at various levels. The exchanges have witnessed a steep decline in daily trade volumes and price fall for all tokens. In addition, traders who were looking at long-term investment through crypto assets will suffer heavy losses, especially those who have made hefty investments, out of their livelihood savings," IANS quoted Rahul Raj, co-founder and CEO, Koinex, as saying.
Praveenkumar Vijayakumar, founder and CEO, Belfrics Global, another cryptocurreny exchange, said while the RBI’s move may sound the death knell for many Indian exchanges and drive away investors, it will not affect cryptocurrency transactions in the long run.
"As and when global prices advance, Indians will find their way to get these assets through p2p (peer-to-peer) markets," he was quoted as saying.
Last week, the RBI, in its first bi-monthly Monetary Policy Committee meeting of this fiscal, announced that regulated entities already providing services to any individual or business dealing in digital currencies have been given three months to exit the relationship.
"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," RBI deputy governor BP Kanungo said.
"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," he added.
"This move by the RBI might see an irreversible negative ripple effect across the ecosystem. So, overall, the mood in the market is dismal," said Rahul Raj.
The industry stakeholders also rued the fact that they were not consulted before RBI took its decision.