RBI puts the brakes on the bitcoin train in India

Mumbai, January 17: Enthusiasm over bitcoins has dampened in India after the country’s central bank cautioned investors to be wary of using virtual currency because of the associated security, financial and legal risks.

Bitcoin, which was introduced in 2009 by a developer known as Satoshi Nakamoto (the developer’s real name or names is unknown), is an online currency created by users, also called miners, by solving complicated math problems on the Internet. The currency is designed in a way that will produce 21 million coins that can be traded or, increasingly, used to buy things. The Reserve Bank of India’s advisory on Dec. 24 prompted some Indian bitcoin traders to suspend their operations, even as regulators seek clarity on digital currencies and ways to regulate them. The RBI’s worries include taxation, security risks, losses due to the volatility and money laundering.

While regulators have not deemed virtual currencies illegal, India’s law enforcement agency, the Enforcement Directorate, raided the offices of a few companies that operate bitcoin trading websites. While this might slow the adoption of bitcoins as a method of exchange, some see it as a necessary step in the currency’s evolution.  “This is not an attack on bitcoins, but one of its outcomes. They (regulators) want to prevent money laundering and if you want to stop someone from using it in an illegal fashion, they seem to be going down the right path,” said Benson Samuel, a bitcoin developer who runs coinsecure.in. He added that RBI’s advisory may slow down the adoption of virtual currencies in India.

Like the RBI, global regulators are wary of the currency, which is not subject to the same kind of regulations as traditional money. China has banned banks from clearing transactions in bitcoins, while Switzerland has said they are prepared to treat it as a foreign currency. Only the United States [and Canada] supports the coin openly. Indian Revenue Services officials visited CoinMonk Ventures, which runs bitcoin buying and selling website unocoin.com, in December, seeking information on the digital currency, said its chief executive, Sathvik Vishwanathan.

“They (IRS officials) have asked me to submit a paper describing how bitcoin works, how transaction works, how to mine bitcoins and what happens technically in bitcoin mining,” Vishwanathan said. Unocoin, one of the websites that suspended operations a day after the RBI note, resumed operations on Jan. 8 after seeking legal advice. Buysellbitco, one of the oldest websites trading in bitcoins in India, was the first to shut down after the RBI’s advisory and the company was raided by the enforcement directorate. The site used to record about 12 million rupees ($194,900) of bitcoin transactions every month, Chief Executive Mahin Gupta said on Dec. 15 at the Global Bitcoin Conference in Bangalore. Gupta was not available for comment after the raids.

Despite this, many entrepreneurs are confident that the currency will gain traction. A group of traders have formed a group — Bitcoin Alliance of India — to spread awareness about the currency and liaise with regulators. Tarun Thadani, an owner of the Kolonial cafe in Mumbai, does not officially accept bitcoins, but has already done a few transactions through his personal wallet on behalf of the cafe. One example: Thadani personally will sell you a pizza from Kolonial in exchange for bitcoins, then square his own accounts with those of the cafe.

“I am looking at bitcoin as an experiment to see if it can work as barter system. I have a very good feeling about it and see it as growing only stronger,” Thadani said. When it comes to usage, India is still far away from other countries such as the United States, where people reportedly have bought Teslas and Lamborghinis with the virtual currency. According to research firm The Genesis Block, bitcoin software downloads in India increased 17.2 percent in the third quarter of this year, Tech Crunch reported in December. India also clocked a more than 100 percent increase in software downloads during the first six months of 2013 as compared to previous all-time downloads, a report by the same research firm showed.

India’s own version of virtual currency, Laxmicoin, named after the Indian goddess of wealth, is being developed by a Jaipur-based company of the same name. A survey conducted by the company in Jaipur and Bangalore found that local businessmen were unhappy with the high transaction fees and delays in receiving payment after their customers transacted via card machines, its co-founder Raj Dangi said. “When we told those guys about this (Laxmicoin), they were thrilled. They said ‘if I can transfer funds using my mobile, nothing like it’,” Dangi told Reuters at the Global Bitcoin Conference in Bangalore in December.

The company is developing a system to enable Laxmicoin payments through SMS and e-mail, but Dangi did not elaborate further. They are currently waiting for regulators’ approval before they launch their model. Bitcoin prices surged back to over $1000 apiece on Jan. 7, after online games maker Zynga said they were testing a system to process bitcoin transactions on their network. Prices had fallen to as low as $455 in December after Chinese authorities prohibited banks from transacting in virtual currencies.