RBI has recently directed all agencies regulated by it to stop doing any business with persons (or entities) dealing with Virtual Currencies (VC).
Notably, the government and the RBI had already been flagging the inherent risks in dealing with crypto-currencies.
What are the directions issued?
In what is by far the most direct action taken thus far, the Indian central bank issued a circular to clamp the proliferation of crypto-currencies.
The RBI circular mandates the stoppage of all services to those dealing in VCs, with regard to their purchase or sale of crypto-currencies.
This covers - maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, and accepting VCs as collateral.
In addition, the RBI stipulated a three month time from the date of the circular to exit any such relationship they might already be in.
Why was such an action taken?
The RBI and the government have repeatedly issued warnings to people dealing in crypto-currencies as the there are inherent financial risks.
The Finance Ministry even referring to them as “Ponzi schemes” in which investors stand to lose all their money.
The fear among policymakers is that crypto-currencies, being an alternative to fiat currency, could be misused to launder black money or finance terrorism.
RBI is also said to have constituted a committee to look into the merits and demerits of it issuing a Rupee backed digital currency.
Hence, some see that the current crackdown is ring-fencing of non-state crypto-currencies as a first step to make way for RBI’s virtual currency.
How have various crypto-dealers reacted?
Several crypto-currency exchanges have said that though harsh, the RBI’s stance does not explicitly outlaw trade in crypto-currencies in India.
They believe that this move only segregates crypto-currencies from fiat ones.
Nevertheless, writ petitions challenging the RBI’s order have already been filed on the grounds that it violates Article 19 of the Constitution.
Quick Fact:
Ponzi Scam
This is an investment bubble, which is beneficial for investors till a tip off point is reached, when the bubble crashes and results in huge losses for investors.
Here, investments (shares, bonds, property etc...) are sold to interested investors and they earn by reselling these for higher prices.
In this model, value of investments increases only due to the availability of newer willing investors in the market.
As there is no real revenue generation from the investments, once the new investors are exhausted, then the prices of investments crash.
