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RBI and Virtual Currencies


  • G.S. Paper 2,3

Why in news?

  • RBI directed all agencies regulated by it to stop doing any business with persons (or entities) dealing with Virtual Currencies (VC).
  • The government and the RBI had already been flagging the inherent risks in dealing with crypto-currencies.

What are the guidelines issued?

  • In what is by far the most direct action taken thus far, the Indian central bank issued a circular to clamp the proliferation of crypto-currencies.
  • The RBI circular mandates the stoppage of all services to those dealing in VCs, with regard to their purchase or sale of crypto-currencies.
  • This covers – maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, and accepting VCs as collateral.
  • In addition, the RBI stipulated a three month time from the date of the circular to exit any such relationship they might already be in.

What was the need for such an action taken?

  • The RBI and the government have repeatedly issued warnings to people dealing in crypto-currencies as the there are inherent financial risks.
  • The Finance Ministry even referring to them as “Ponzi schemes” in which investors stand to lose all their money.
  • The fear among policymakers is that crypto-currencies, being an alternative to fiat currency, could be misused to launder black money or finance terrorism.
  • RBI is also said to have constituted a committee to look into the merits and demerits of it issuing a Rupee backed digital currency.
  • Hence, some see that the current crackdown is ring-fencing of non-state crypto-currencies as a first step to make way for RBI’s virtual currency.

How did the crypto-dealers react to this?

  • Several crypto-currency exchanges have said that though harsh, the RBI’s stance does not explicitly outlaw trade in crypto-currencies in India.
  • They believe that this move only segregates crypto-currencies from fiat ones.
  • Nevertheless, writ petitions challenging the RBI’s order have already been filed on the grounds that it violates Article 19 of the Constitution.

What is Ponzi Scam?

  • Ponzi Scam is an investment bubble, which is beneficial for investors till a tip off point is reached, when the bubble crashes and results in huge losses for investors.
  • Here, investments (shares, bonds, property etc…) are sold to interested investors and they earn by reselling these for higher prices.
  • In this model, value of investments increases only due to the availability of newer willing investors in the market.
  • As there is no real revenue generation from the investments, once the new investors are exhausted, then the prices of investments crash.

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