RBI, government try to get a grip on Bitcoin business

BitcoinA number of bitcoin operators in India began suspending their business following RBI's warning against the use of the currency.

The Reserve Bank of India advisory on Bitcoins accepts that it has currently no powers to ban the digital currency. On Tuesday the RBI issued a caution that will however protect the bank more than block any trading with the e-currency. But it still had an effect. On Thursday a number of bitcoin operators in India began suspending their business following the warning against the use of the currency.

The action, however, comes even before government security agencies like Financial Intelligence Unit have offered any views on Bitcoins to the monetary regulator.

The RBI action has a clear back-end concern, though. Bitcoins could rapidly become a perfect medium to launder money. Allied with the sudden rise in interest among some Indian companies and investors in accepting Bitcoins and a shadow world of competitor for the Indian rupee has just opened up.

"The RBI is presently examining the 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," the advisory states. But it also holds the offer of allowing the poor to access virtual money without having to possess a credit or debit card. And former US Fed chief Ben Bernanke acknowledged that there are no regulations that make the use of Bitcoins illegal.

To be effective, the government will have to rewrite the Foreign Exchange Management Act. But for RBI the headache is immediate. It is already waging a struggle against another shadow market ó the nondeliverable forwards market in the rupee at offshore destinations. The impact of Bitcoins at a microscopic level, in comparison can, however, spring unpleasant surprises soon.

The concern has increased after China's central bank regulated the digital currency for the first time on December 5 by banning financial institutions and payment providers from conducting transactions in Bitcoins.

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