Virtual alert: RBI warns users against bitcoin risks

Dec 25 2013, 08:58 IST
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Currently, it is estimated that there are 12 million bitcoins in circulation. Currently, it is estimated that there are 12 million bitcoins in circulation.
SummaryBitcoins were used extensively on Silkroad, an online black market for illegal drugs.

The Reserve Bank of India (RBI) on Monday warned users, holders and traders of virtual currencies, including bitcoins, of financial, operational, legal, customer protection and security related risks.

The RBI said virtual currencies as a medium for payments were not authorised by any central bank or monetary authority.

The central bank said it was keeping watch at the developments relating to certain electronic records claimed to be decentralised digital currency such as bitcoins, litecoins, bbqcoins, dogecoins and their usage or trading in the country.

Bitcoins are digital or virtual currency that uses peer-to-peer technology to facilitate instant payments. Bitcoin is an alternative currency, which uses cryptography for security, making it difficult to counterfeit. Bitcoin issuance and transactions are carried out collectively by the network, with no central authority.

“As such, there is no established framework for recourse to customer problems/disputes/chargeback, etc,” the RBI cautioned.

The total number of bitcoins that will be issued is capped at 21 million to ensure they are not devalued by limitless supply. Currently, it is estimated that there are 12 million bitcoins in circulation.

RBI said there were several media reports of the usage of virtual currencies, including bitcoins, for illicit and illegal activities under several jurisdictions.

Bitcoins came under scrutiny as they were used extensively on Silkroad, an online black market for illegal drugs. Silkroad was shut down by the FBI in October and the agency seized $28.5 million worth of bitcoins.

“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,” the RBI statement added.

The bitcoin community, on the other hand, welcomed the word of caution from the RBI and hoped that it would get better regulatory oversight. “If you look at what the RBI said its just cautioning people and there are a lot of risks in bitcoins. I think it will definitely raise more awareness and we've been asking for more regulatory oversight,” said Sunny Ray, director of business development at Buttercoin.

Buttercoin is a white label Bitcoin exchange based out of Palo Alto, California, and looking to expand in India.

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