Bitcoin breached $12000 mark on Wednesday for the first time ever. The virtual currency has soared more than 1,000 percent since the start of the year. Last Wednesday, it was trading at $9,500. Nothing moves so fast in the financial world. So what is fuelling this rapid rise of bitcoin? This is something that has puzzled many bankers and financial analysts. Business magnet Warren Buffett recently called it a 'real bubble'. He is not alone to caution the investors against cryptocurrency. Garrick Hileman, a research fellow at the University of Cambridge's Judge Business School, earlier said: "What's happening right now has nothing to do with bitcoin's functionality as a currency - this is pure mania that's taken hold." Despite these cautionary words from financial experts, bitcoin continues to rise.
Now, another warning has come for the virtual currency investors. This time from the Reserve Bank of India. The Central Bank on Wednesday issued its third warning, reminding the investors of its earlier concerns. In its first warning issued on December 24, 2013, the RBI said that the creation, trading or usage of Virtual currencies or VCs 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," it added.
The RBI's next warning came this year on February 1. It reiterated that the Reserve Bank has not given any licence or authorisation to any entities to operate such schemes or deal with bitcoin or any virtual currency. The bank regulator categorically said that any investor or trader dealing with virtual currencies 'will be doing so at their own risk'. Not only this, it went on to explain as to why the RBI feels that the investors could lose their money in cryptocurrency.
The RBI listed out some risks that virtual currency may pose to investors. Here are five
- The RBI says that virtual currency being in digital form are stored in digital-electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any 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 virtual currency take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems/disputes/charge backs.
- There is no underlying or backing of any asset for virtual currency. As such, their value seems to be a matter of speculation. Huge volatility in the value of such currency -in this case bitcoin-has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
- So far, cryptocurrencies are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of virtual currency on such platforms are exposed to legal as well as financial risks.
- It has been reported that usage of digital currencies are largely for illicit and illegal activities. The absence of information of counter-parties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism laws.