MUMBAI: The Reserve Bank of India has expressed concern over the rise of "virtual currencies" which are the likes of bitcoin. The concerns have been voiced at a time when the US authorities have cracked down on a virtual currency company "Liberty Reserve" alleging that it was involved in money laundering.

Virtual currencies or crypto currencies have also come under the focus of the police. D Sivanandhan, former DGP Maharashtra & CP Mumbai, and security adviser, central security cell, RBI, recently said crypto currency are becoming major avenue for money laundering.

In its financial stability report, RBI has for the first time raised the issue of virtual currency in India. "The unregulated link between virtual currency (if permitted), and traditional currency with a legal tender status poses challenges as the complete control over the differently denominated virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will," RBI said. It added that regulators are studying the impact of online payment options and virtual currencies to determine potential risks associated with them. Explaining this new online creation, RBI said: "A virtual currency can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. The virtual currency schemes provide a financial incentive for virtual community users to continue to participate and are able to generate 'float' revenue for their owners. They also provide a high level of flexibility regarding the business model and business strategy for the virtual community," RBI said.

The central bank said some virtual currencies can be exchanged for real money, goods and services. "Under some category of virtual currency schemes which provide for bidirectional flows, it acts like any other convertible currency, with two exchange rates (buy and sell). In such schemes, the virtual currency can be used to buy not only the virtual goods and services, but also to purchase real goods and services. Virtual currency schemes are different from electronic money schemes as the virtual currency being used as the unit of account has no physical counterpart with legal tender status."

A virtual currency scheme may also be designed to compete with traditional currencies used for international trade. The absence of a distinct legal framework implies that the traditional rules under financial sector regulation and supervision, including the institution of central banks, are not involved in the case of virtual currency, RBI said.