Cryptocurrencies are now emerging as hotbeds of speculation. A classic example is the bubble that has been undergoing in Bitcoin. the crypto currency reached at a sky-high price of $19200 in December 2017 from just $1 in May 2011.

Internationally, cryptocurrencies are regulated as commodities by several central banks. They are not treated as currencies as the name suggests and rather they have emerged as investor’s darlings because of the curious techno-cum Only few credible cryptos have got the status of currencies. Over the last six years, several Bitcoin exchanges that are not regulated by national regulators are carrying out transactions in bitcoin.

The rising prices of bitcoin always indicate a steep correction of bitcoin prices. According to Wall Street Journal (WSJ), majority of bitcoin trade are concentrated in East Asia. Japan, South Korea and Vietnam together accounted for 80 percent of bitcoin trading activity at the end of November, according to WSJ. Interestingly Japan allowed the use of bitcoin and several other cryptocurrencies for payments.

Indian scenario

In India, bitcoin trade is carried by unregulated digital exchanges that are 11 in number according to Tax Department estimates. People are investing in money expecting huge returns as Bitcoin registered a price increase from just $1000 in January 2017 to $15000 at the end of 2017.

But anytime a burst can happen. In that case, investors will lose their money. As Bitcoin has entered a bubble phase and speculators have shown big interest in several other crypto variants, the RBI and Finance Ministry have come with timely warnings against dealing with crypto currencies.

The RBI as the central Bank issues money/payment related warnings on VCs. Regarding the asset/trading security side, the government and SEBI are giving their own cautions. Similarly, the tax Department is scrutinising the actions by investors to check the tax implications.

Risks related with VCs

There are two major risks related with VCs. Firs is that they may be used for money laundering purposes. Secondly there is the problem of investors’ security. Large scale participation investors may led to loss of their money as VC value undergoes big fluctuations.

RBI’s stance on Cryptocurrencies

The fundamental stand of the RBI about bitcoin and other cryptocurrencies is that they are not legal tender currencies. They can’t be used for payments as usual currencies. Rather, they have big risks without any regulation and support. The RBI has issued warning in three times first in December 2013, followed by February 2017 and last on December 5, 2017. The initial caution by the RBI in 2013 describes why investment in virtual currencies like Bitcoin is risky.

All the three cautions/warnings provided information to users, holders and traders of Virtual Currencies (VCs) including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.

Virtual currencies or VCs as a medium for payment are not authorised.  The central bank also highlighted absence of regulation of virtual currency trading. “No regulatory approvals, registration or authorization is stated to have been obtained by the entities concerned for carrying on such activities.”

The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities. As such, they may pose several risks to their users, including the following:

  • Virtual currencies are stored in digital form and hence are prone to losses due to hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not supported by an authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
  • Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis as there is no authorised central agency to regulate such payments. Hence, there is no way to settle customer problems / disputes / charge backs etc.
  • The VCs get their value from speculation without any backing. Hence, money may be lost from extreme volatility.
  • VCs, such as Bitcoins, are traded on exchange platforms that have low legal status. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
  • VCs including Bitcoin are reportedly used for illicit and illegal activities in several jurisdictions. This may force investors into anti-money laundering and combating the financing of terrorism (AML/CFT) laws.

The Finance Minister stated that VCs can’t be used as legal tender currencies; at the same time ruled out knee-jerk actions.

Government Panel on VCs

The government has appointed an Inter-Disciplinary Committee on cryptocurrencies comprising nine members including representatives of RBI, SBI, NITI Aayog and Department of Financial Services in April 2017. Though the Committee submitted its recommendations in August 2017, details of the report is yet to be published.

This panel was asked to examine the existing framework on digital/crypto currencies both in India and globally and come out with measures for dealing with such virtual currencies on issues relating to consumer protection, money laundering etc. The accounting and taxation treatment of the virtual currencies has also examined by the committee.

Tax Department on VC investment

The Tax Department warned that it is examining the activities of High Net-worth individuals and reportedly issued tax notices to them. What matters for the tax Department is the tax impact of the gain made by investors while they invest in VCs. Income Tax Department has launched surveys in the cities of Delhi, Mumbai, Pune, Bengaluru and Hyderabad. Investment and gain in cryptocurrency gain is subjected to capital gains tax as in the case of other assets. In the next budget, the government is expected to bring a regulatory approach on this regard.

Need for regulation 

Timely regulation of the VC market is necessary by providing guidelines or by empowering commodity regulator like SEBI to regulate/control or ban the VC oriented investment/payment activities. Similarly, guidelines for tax treatment of various cryptocurrency transaction is also to be designed.


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