Cryptocurrencies : Who will regulate RBI or SEBI?

The Finance Minister Shri Arun Jaitley stated in his India Union Budget Speech on 1 February 2018 that, “The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system. “.

Any attempt to regulate the cryptocurrencies without first deciding on the regulatory authority is set to reignite a turf war between the RBI and the SEBI.

India’s central bank – the Reserve Bank of India and the securities regulator – the Securities Exchange Board of India were engaged in a turf war over jurisdiction of regulation of cryptocurrencies such as Bitcoin – the largest and best known digital currency – reported The Business Standard on 22 July 2017. According to the news report, the RBI is of the opinion that bitcoin is a security rather than currency and should be regulated by SEBI. The proposal has not gone down well with the latter which opposes the suggestion.

Broadly speaking medium of exchange i.e., currency and payment and settlement systems fall under the jurisdiction of RBI and transactions in securities fall under the ambit of SEBI.

Therefore the question of regulation of cryptocurrencies such as Bitcoin would be limited to determination if the same is a security or a medium of exchange.

According to Bitcoin.org, Bitcoin is an innovative payment network and a new kind of money. Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.

According to wikipedia, Bitcoin is a worldwide cryptocurrency and digital payment system called the first decentralized digital currency, since the system works without a central repository or single administrator. The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain.

On the basis of above, we can conclude that
1. Bitcoin is a medium of exchange;
2. A payment & settlement system.

This appears to fall under the jurisdiction of RBI and it must regulate the cryptocurrencies. However, here lies the pigeon out of the cage, difficult to catch. The decentralised nature of the cryptocurrency system spread across the world without a central authority makes it difficult, if not outrightly impossible to regulate. Bloomberg reported that worldwide, rather than trying to regulate the world of virtual currencies, central banks are mainly warning potential users of risks and attempting to garner some advantage from the distributed-ledger or “blockchain” technology for their own purposes, like upgrading payments systems.

RBI may consider a similar approach to raise the public awareness levels of the pros and cons of dealing in virtual currencies including their propensity to be used for ponzi-type speculation and transnational crime such as recent Wannacry cyber attacks.

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