A number of bitcoin operators in India have begun suspending their business following Reserve Bank of India 's (RBI) warning against use of such virtual currencies due to potential money laundering and cyber security risks.
While RBI is yet to come out with a clear regulatory framework for bitcoins, which have been gaining currency across the world over the past few months, it has issued an advisory cautioning general public against use of bitcoins and other virtual currencies.
Within days of this advisory issued on December 24, a number of entities offering bitcoin services have suspended their operations, temporarily or indefinitely, while websites of a few others have gone down.
However, some other entities continue to run their operations of offering bitcoin exchange services for rupee and other currencies.
Bitcoin is a virtual currency that can be generated through complex computer software systems with solutions shared on a network, although the process is complex and such 'mining' can be done only on very powerful servers.
Hardly three years into existence, bitcoin has already become the world's most expensive currency and its per unit value soared past $1,000 level or about Rs 63,000 recently, although the prices have now slipped below Rs 50,000 level.
There was a phenomenal surge in the exchange rate for bitcoin from little over $200 to well past $1,000 during November, but there has been an extreme volatility since then and the RBI 's warning has further added to its woes in India.
One of the bitcoin operators in India, buysellbitco.in, has posted its website, "Post the RBI circular, we are suspending buy and sell operations until we can outline a clearer framework with which to work.
"This is being done to protect the interest of our customers and in no way is a reflection of Bitcoin's true potential or price," it said.
Another entity, INRBTC also said that "in light of RBI's notice, services of INRBTC.com are being suspended indefinitely".
Explaining its decision, INRBTC said that RBI has stated that users of virtual currencies are exposed to both legal and financial risks.
"Further it (RBI) states that absence of information of counterparties could subject the users to unintentional breaches of Anti-Money laundering and combating the financing of terrorism (AML/CFT) laws," it added.
"The only option left now is suspend the services until further arrangements can be made," INRBTC said, while adding that all trades which have been executed till December 26, 2013 will be processed completely.
"All pending orders will be cancelled and the deposits on those orders will be refunded 100 per cent to the users," it said.
Many other websites offering bitcoin services in India have gone down, although a few continue to operate as of now despite increasing regulatory glare on bitcoins globally.While authorities and experts are becoming worried about its potential money laundering risks, concerns have also been raised about this new phenomenon snowballing into an 'e-ponzi' or an electronic version of investor fraud, given the growing promotion of bitcoin as investments without any enabling regulations for them.
According to a senior official said, pressure has increased on regulatory and enforcement agencies in India after latest moves by China and France on this front.
"The fact remains that regulators are scrambling for ways to regulate this entire gamut of digital currency, as it is a totally new concept in India and even the jurisdiction is not clear as yet on who should regulate them," he said.
While the US has declared that all prevailing money laundering laws would apply to bitcoins, China has asked its banks and other financial institutions not to deal in bitcoins and the public has been asked to do so at their own risk.
Besides, France last week warned its banks about risks related to bitcoins.
At the same time, the experts are also raising concerns about cyber security issues, given the huge scope of money laundering and other illegal activities through use of an unregulated digital currency concept.
Bitcoin came into existence in 2009 and the current number of bitcoin units generated so far stands at about 12 million. However, only a small number of bitcoins are being used for real commercial and retail purposes and a majority of transactions are happening for speculative investments.
Adding to the challenges before the regulators, this e-currency is already being accepted by some online retailers in countries like the US, China and a few others, for various purposes including pizza delivery.
Those looking at this new phenomenon include almost all financial sector regulators as also agencies mandated to handle economic crimes, such as RBI, Sebi and various agencies under the Finance Ministry, a senior official said.
While regulators are tight-lipped about their plan of action, a senior official said that one possible way forward can be following the US, where authorities have decided to subject bitcoins to money laundering rules applicable to all other financial transactions in the country.
Regulators are also looking into claims being made by some entities of being registered bitcoin exchange providers, although they might have merely registered as a company with the Registrar of Companies for generic business purposes.
To make things worse, this virtual currency has become new tool for fraudsters who are promoting bitcoins as the next big investment products with unlimited returns.
A few complaints have already poured in about bitcoins being used by some operators in certain new-age and e-versions of multi-level marketing or ponzi schemes.
Regulators fear that this new phenomenon can give rise to a new kind of illegal investment schemes that could be very difficult to track and clamp down. There is almost zero physical activity when dealing in bitcoins and nearly all transactions take place in the electronic format.