Bitcoin, the world’s most popular virtual currency that was first mined in 2008, can no longer be ignored as just another passing geek fad. The market capitalisation of bitcoins currently stands at $67 billion and daily traded volumes crossed $2 billion last week. The frenzy has been driven by the sudden surge in bitcoin value from $935 in March this year to $4,159 currently — an over threefold increase in four months. This rally in bitcoin value is attracting droves of investors and speculators who are now beginning to get vociferous about governments legalising the use of such virtual currencies. The RBI has so far adopted a conservative approach in dealing with virtual currencies, cautioning investors about the risks in 2013 and recently releasing a statement saying that the bitcoin exchanges in the country are operating without the central bank’s permission and that anyone dealing in these currencies are doing so at their own risk. The inter-disciplinary committee set up by the department of economic affairs to evaluate bitcoins has, however, gone one step further and is looking at ways to regulate these currencies.
The committee is right in ruling out legalising these virtual currencies, designed to remain beyond the purview of regulators. They are created through a process called mining by those solving complex algorithmic equations. Every bitcoin transaction is recorded and verified in open ledgers called block-chains and those creating or buying them store them in digital wallets. Thus it is not possible to control their issue, storage or exchange. Since the value of these currencies is not linked to any underlying asset, it tends to get extremely volatile — the sharp increase in recent months is a case in point. Price declines too tend to be sharp. Price volatility makes these crypto-currencies inappropriate as stores of value or mediums of exchange.
That said, there cannot be a regulatory vacuum in governing these virtual currencies, given the burgeoning user base. Countries such as Japan and Australia are currently trying to frame rules to regulate bitcoin exchanges and dealers. The Japanese government has laid down that all bitcoin trading exchanges and money transfer units have to register with the Japanese regulator, FSA, by October 1. China cracked down on bitcoin trading exchanges earlier this year, forcing them to improve their processes. Australia has moved the regulation of bitcoin exchanges to Austrac, its financial crime fighting agency. India too needs to move along these lines. Bitcoin exchanges in India need to move under the purview of SEBI with the stock market regulator framing rules for registering exchanges, KYC procedures for those trading on the exchanges and means to record the bitcoins that enter into the system. Other activities involving bitcoins such as money transfer, usage for online retail transactions, etc, have to be monitored by the RBI with assistance from the Financial Intelligence Unit that will watch out for money-laundering activity using these currencies.
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