India virtually banned cryptocurrencies like bitcoin with the Reserve Bank of India(RBI) barring regulated entities from providing services to any individual or business dealing in digital currencies.
The central bank has given three months to regulated entities like banks to unwind their positions with the entities related to cryptocurrencies, RBI Deputy Governor BP Kanungo said in a media conference.
The regulator, however, decided that it will promote the use of blockchain – a public ledger that serves as the backbone of bitcoin – in financial services for strengthening transparency and improving inclusion.
In its statement RBI said that technological innovations, including those underlying virtual currencies, have the potential to improve the efficiency and inclusiveness of the financial system. However, Virtual Currencies (VCs), also variously referred to as crypto currencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others.
RBI it its first bi-monthly monetary policy has announced that any entity regulated by them such as banks, wallets etc. shall not deal with or provide services to any individual or business entities for buying or selling of cryptocurrency such as bitcoins.
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. RBI will be issuing circular in this regard for further details.
If banks, e-wallets and any other entities regulated by RBI are not allowed to facilitate sale or purchase of cryptocurrencies, obviously individuals will not be able to transfer money from their bank accounts to their crypto-trading wallets.
"A person will not be able to transfer money from his savings account to his cryptowallet" says, Abizer Diwanji, Head, Financial Services, EY India.
The central bank’s move comes after at least three warnings to the public at large for being cautious while dealing with cryptocurrencies.
Bitcoin was trading at $6,950 in international market just before RBI announcement but in India on Zebpay, a leading crypto exchange, it was quoting at Rs 500,000 at an almost 8 per cent premium. However, at 11:30 pm IST, global price of Bitcoin was $6,701, which works out to Rs 435,565 in rupee terms (1 dollar=Rs 65) but on Zebpay the price is quoted at Rs 340,400, a 27 per cent discount.
The move comes as governments around the world are stepping up scrutiny of virtual currencies mainly due to their unregulated nature. The meteoric rise in the value of bitcoin in 2017, the most popular cryptocurrency, triggered worries that such currencies could facilitate everything from money laundering to tax evasion and fraud.
Since reaching a peak of almost $20,000 in early December last year, a series curbs have pulled down bitcoin and rival cryptocurrencies, with losses intensifying since the start of 2018. China, once a global hub for cryptocurrency trading, is now leading the crackdown making them illegal. Japan and South Korea too have put in place a number of regulations.
Finance Minister Arun Jaitley had already earlier said that the Indian government doesn't consider cryptocurrencies as legal tender and will take all measures to eliminate payments using them.
RBI said that it will issue detailed guidelines in a circular soon.
India isn’t giving up on the idea of a virtual currency completely. In line with central banks around the globe, the RBI too is mulling introducing a fiat digital currency. “These are issued by the central bank and are considered the liability of the central bank,” Kanungo said. “They will be in circulation in addition to the paper currency that we have. It also holds the promise of reducing the cost of printing notes.”
Accordingly, the RBI has constituted an interdepartmental committee that will submit a report on the feasibility of a fiat digital currency. The committee will submit its report by June-end.