The Reserve Bank of India has cautioned virtual currency users in the country about the potential risks involved in using such currencies including Bitcoins

India’s central bank has cautioned virtual currency users in the country about the potential risks involved in using such currencies including Bitcoins.

The Reserve Bank of India said that there could be potential financial, operational, legal, customer protection and security related risks that virtual currencies pose.

This comes as a blow to the adoption of virtual currencies in India.

The bank, which has been watching developments relating to electronic records claimed to be “Decentralised Digital Currency” or “Virtual Currency” (VCs), such as, Bitcoins, litecoins, bbqcoins, dogecoins said

The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.

As such, they may pose several risks to their users, including the following said the bank

VCs being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.

Payments by VCs, such as, Bitcoins take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc.

There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.

It is reported that VCs, such as, Bitcoins are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.

There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.

The Reserve Bank has also stated that it is examining issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.

Earlier this month, International Bitcoin Exchange Buttercoin said that it was talking to financial Institutions in India to set up white labeled Bitcoin exchanges for them. A global bitcoin conference was organised in Bangalore in December.

If you are new to the idea of Bitcoins, read: Bitcoin 101: Five Things You Must Know About Bitcoins.