Virtual currencies are prone to risks, cautions RBI

The Reserve Bank of India has cautioned that virtual currencies (VCs), including bitcoins, pose potential financial, operational, legal, customer protection and security risks to users, holders and traders as no central bank or monetary authority has an oversight role on these currencies.

Speaking at a fintech conference jointly organised by FICCI, IBA and Nasscom, R Gandhi, Deputy Governor, RBI, underscored that as VCs are stored in digital/electronic form, they are prone to, among others, losses arising out of hacking, loss of password, compromise of access credentials and malware attacks.

“Payments by VCs are on a peer-to-peer basis. No established framework for recourse to customer problems, disputes, charge backs, etc., is feasible. There is no underlying or backing of any asset for VCs. Value seems to be a matter of speculation.

“Legal status is definitely not there. While this is a purported objective of a VC, it puts a natural limit for its progression...And finally, the usage of VCs for illicit and illegal activities has been reported as uncomfortably large,” explained Gandhi.

The Deputy Governor said his arguments against VCs stem from two key elements — confidence and anonymity. He elaborated that a ‘currency’ should be able to sustain these two elements for ever; its exalted status will be impaired once either of these elements gets affected.

“The ‘confidence’ in bitcoins or for that matter any VC based on blockchain or any other technology is limited to its initial rounds and circles only. The initial rounds are always filled with adventurists and risk seekers.

“The moment the masses get in, the risk-avoiders get in, they will need greater ‘confidence’ for acceptance and that can come only if an ‘authority’ issues it,” said Gandhi.

As regards ‘anonymity’, the Deputy Governor observed that blockchain technology apologists say it can be made very difficult to track. But ‘difficult to track’ is not ‘anonymity’, he pointed out.

Therefore, the idea that blockchain will eliminate ‘currency’ by ushering in ‘virtual currency’ would remain a pipe-dream, added Gandhi.

“Has currency died? Is it dying? Or at least will it die? In all these years, you will find that currency has actually increased in absolute terms, not just in developing and emerging economies, where penetration of banking and finance is not yet complete, but also in developed economies, where penetration of banking and finance has been far larger.

“Countries are printing more and more currency. Perhaps the Nordic countries are the exceptions,” said the Deputy Governor.

Marketplace financing (or crowd funding/ peer-to-peer lending) links the fund-raiser and the fund-provider, thereby eliminating the need for a financial intermediary and, therefore, all the costs associated with it. But Gandhi posed, “Who guarantees the good performance of the fund-raiser and fund-provider? Who will enforce the contractual obligations?”

When each of them is faceless to one another and at a great distance, even beyond borders, the issue gets complicated. Therefore, marketplace financing may not be suitable for large amounts, he added.

“It is a received wisdom in finance that after the initial rounds of acceptances and successes, the moment the rounds increase and more number of people get attracted in geometrical progression the chain breaks and fails.

“You need an organised and a regulated entity to ensure that the innocent and weak parties are protected. Any democratic set-up cannot dismiss it quoting the ‘consenting adult’ argument. The ‘consenting adult’ argument cannot be presented when mass scale failure takes place,” the Deputy Governor said.