It made it clear that Indian bitcoin exchanges lack the regulatory approval needed to exchange digital currencies for rupees and other national currencies. Local exchanges were quick to suspend operations, but that was not enough.
Within 48 hours of the RBI notice, India’s Enforcement Directorate (ED) raided at least two bitcoin exchanges, buysellbitco.in and rbi.rbit.co.in, owned by Nilam Doctor. Investigators questioned the owners of both sites in an effort to ascertain whether any transactions carried out on their platforms violated the Prevention of Money Laundering Act and the Foreign Exchange Management Act.
For the time being, the owners of the platforms are not in custody and they do not appear to be facing any criminal charges. This may be indicative of another problem – even Indian regulators do not know what to do and even if they do, they lack a clear regulatory framework for digital currencies.
According to the Times of India, the RBI does not even plan to develop a regulatory framework for digital currencies. Therefore, at this moment in time, bitcoin platforms based in India simply cannot get regulatory approval. Additionally, it seems that this situation is not set to change anytime soon.
"Regulation comes only when people are doing certain business and we come to understand that something wrong is happening,” RBI deputy governor KC Chakrabarty told a gathering of Indian entrepreneurs on Saturday.
“First of all, we don't understand this subject.”
The limits of the legal system
Chakrabarty stressed that the RBI does not regulate nor support digital currencies. He was keen to point out that bitcoin regulation has not been enacted anywhere else in the world, and that people who understand the risks are free to do whatever they like with their money.
"Whether it is ... legal or illegal, we don't know,” he said bluntly. “If it crosses the limit of legality then people may face a problem. So people should be cautious.”
Chakrabarty’s statements are unusually candid, and illustrate a wider problem for financial authorities. Regulators simply cannot deal with digital currencies as they have to operate within the existing legal framework, which does not contain the provisions needed to regulate such currencies.
Furthermore, he seems to imply that regulating digital currencies is not RBI’s job to begin with. Hence, it is understandable why the RBI does not plan to assist in the development of a new regulatory framework for digital currencies.
In essence, the executive branch and national regulators have their hands tied, they cannot take any meaningful, constructive action without new legislation and there is simply no political will to deal with the issue.
They can, however, try to apply existing foreign currency legislation to bitcoin operators, which effectively renders their activities illegal.
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