The Reserve Bank of India may have warned against the use of cryptocurrencies like bitcoins on several occasions, but it is not averse to the underlying blockchain technology and is now mulling possibilities of having a central bank-backed digital currency.
“We recognise that the blockchain technology or the distributed ledger technology that lies beneath the virtual currencies has potential benefits for financial inclusion and enhancing the efficiency of the financial system and we also believe that they should be exploited for the benefits of the economy,” said B.P. Kanungo, deputy governor of RBI.
The RBI has constituted an inter-departmental group to provide guidance on the same. The report will be submitted by the end of June, 2018.
The most popular cryptocurrency Bitcoin was created in 2009. In recent years, several rival virtual currencies have emerged like Ethereum, Ripple, Litecoin and Monero among others. Most of these, however, were created by private entities and don't have backing of any government or central bank in the world.
These currencies are largely unregulated and their valuations fluctuate wildly on speculations. There have also been cases of hacking where cryptocurrencies valued in millions of dollars have been stolen from crypto exchanges.
Now, there have been moves by several central banks to explore possibilities of starting their own virtual currencies. These will have the backing of central banks and could be in addition to the existing paper currencies.
The RBI's move to set up a committee to study such a possibility comes in that backdrop.
“In response to the emergence of the private digital tokens all over the world, several central banks are debating a possibility of introducing a fiat digital currency... Recognising this, we have constituted an inter-departmental committee in the RBI. It will explore the feasibility and desirability of issuing a digital currency by the central bank and to guide us in this matter in future,” said Kanungo.
Even as the RBI explores possibilities of its own regulated digital currency, it has directed banks and other regulated entities to stop providing services to those dealing in the existing cryptocurrencies, a move it says is to “ring fence” the entities regulated by RBI.
Virtual currencies raise concerns of consumer protection, market integrity and money laundering, among others, it feels.
“In the past, RBI has repeatedly cautioned the public, the users, holders and traders in virtual currencies regarding the various risks they are undertaking by exposing themselves to cryptocurrencies. Now we have decided to ring fence the RBI-regulated entities from the risks of dealing with entities associated with virtual currencies,” said Kanungo.
These RBI-regulated institutions will be required to stop their business relationship with such entities dealing with cryptocurrencies with immediate effect.
Regulated entities, which already provide such services shall stop that within three months, Kanungo added.