RBI needs to take a position on Bitcoin’s status soon

DeekshaSinghBangalore was the venue for an interesting event almost two weeks ago. The Global Bitcoin Conference was organised by the digital currency awareness organisation CoinMonk to highlight the importance of virtual or digital currencies. Bitcoin is the most prominent currency among these virtual currencies, that is, money that exists as computer code. Various stakeholders are keen on convincing the government and regulators that Bitcoin is a valuable economic innovation, and that it will not be used for illegal transactions.

What is Bitcoin?

Bitcoin is an open source, peer-to-peer, electronic cash system. It is software that allows the virtual currency named Bitcoin to be mined and stored in a personal Bitcoin wallet. It also allows users to send and receive Bitcoin(s). Bitcoin cannot be redeemed for another type of money or for a commodity, like gold. It is not backed by any government or other legal institution.

Traditional currency usually has the following features: scarcity, divisibility, portability, and easy storage. They are minted and issued by central banks of countries.

In the case of Bitcoin however, new Bitcoins are issued to competing ‘miners’ online. These miners solve problems using their computers and thus generate Bitcoin. A person can create unlimited free Bitcoin accounts. You can find a primer on the use of Bitcoins here.

BitcoinThe growing popularity of Bitcoin, since its inception in 2008, has resulted in the evolution of a number of entities such as exchanges, transaction services providers, and joint mining operations. It is now accepted by a number of service providers.

In India too, Bitcoin has found a fair number of users. According to this article in the Mint, more than 24,000 people in India have downloaded Bitcoin in 2013 itself. While this number of users is nowhere close to countries like U.S., China, or Germany, there is enough activity to suggest that government and regulators in India should pay attention. The Reserve Bank of India (“RBI”) however, is yet to take a stand.

Is Bitcoin currency?

Earlier this year, a U.S. District Court in Securities and Exchange Commission v. Trendon T. Shavers, as part of a larger discussion, discussed whether Bitcoin is a currency. The court held that:

It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”

Now, in India, Entry 36 in List I in the Seventh Schedule to the Constitution of India, 1950 squarely places the power of making law on the subject of ‘currency, coinage, and legal tender’ with the Union Government. The RBI was formed under the Reserve Bank of India Act, 1934 (“RBI Act”) to take over the management and issue of currency from the Central Government. Section 22 of the RBI Act gives the RBI the sole right to “issue currency notes of the Government of India”. Interestingly, there is no definition of ‘currency’ or ‘currency notes’ in the RBI Act. At the same time, there is also no express prohibition on issue of ‘private currency’ by private entities.


There is a definition of currency in Section 2(h) of the Foreign Exchange Management Act, 1999, according to which ‘currency’ includes “includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank”. This means that until the RBI notifies virtual currencies as ‘currency’, the management and issue of Bitcoin remains legally, a grey area.

The RBI is certainly aware of the existence of, and the risks involved with virtual currencies. While it has stated that the absence of a distinct legal framework means that the traditional rules of financial sector regulation and supervision are not involved, it has remained silent on what rules need be evolved to deal with such currencies.

That the regulation of Bitcoin and other virtual currencies is necessary is obvious even from a cursory examination of the legal issues it throws up. For example, a question similar to the issue in the Shavers case mentioned above, is whether Bitcoin investments in Indian entities will be considered ‘securities’? What about the ramifications on foreign exchange management and regulation? To quote this article, the use of Bitcoin can significantly reduce the costs of transferring U.S. dollars across the border from India. Of course, the opportunities for the use of such a currency—which is fungible with other currencies but is not owned or regulated by any government or legal entity—provides huge avenues for money laundering and use in illegal activities.

So, as the number of Bitcoin users in India increases and Bitcoin exchanges like Buttercoin gear up to start operations in India next year, the RBI (which has currently adopted a wait-and-watch policy) will need to clarify its position sooner rather than later.

(Deeksha Singh is part of the faculty on


Quick summary of Raghuram Rajan’s first speech as RBI governor

RaghuramRajan_RBIgovernor_speechFour days ago, Raghuram Rajan delivered his first speech as the twenty-third Governor of the Reserve Bank of India (“RBI”). Here are some key points from the dramatic speech:


Monetary policy

The first monetary policy of Mr. Rajan’s term can be expected on September 20.

The Deputy Governor Urjit Patel will form a panel featuring RBI staff and other experts to come up, within three months, with suggestions on steps to strengthen the monetary policy framework.

Inclusive development

New branches without prior RBI approval for domestic scheduled commercial banks across India – Banks will still be required to fulfil certain inclusion criteria in underserved areas in proportion to their expansion in urban areas. The RBI will also restrain improperly managed banks from expanding until they convince the RBI of their stability.

New bank licenses – A committee, formed outside the RBI and chaired by Dr. Bimal Jalan, will screen license applicants. The RBI will also explore other ways making entry easier and the licensing process more frequent.

Banking-and-Finance-LawForeign banks – The regulatory and supervisory control over the local operations of foreign banks will be increased. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment on a reciprocal basis.

Infusing credit – In order to ensure the flow of credit to the productive sectors of the economy, the RBI plans to limit the requirement for banks to invest in government securities to what is strictly needed from a prudential perspective.

Financial markets

The RBI plans to cooperate with the government and SEBI to liberalise the financial markets and remove restrictions on trading in financial instruments.

The RBI will take steps to provide exporters and importers with greater flexibility in their risk management, such as:

(1) enhance the limit available to exporters to re-book cancelled forward exchange contracts to the extent of fifty per cent of the value of cancelled contracts;

(2) allow a similar facility to importers to the extent of twenty-five per cent; and

(3) to develop the money and government securities markets, introduce cash settled, ten-year-interest-rate future contracts and examine the introduction of interest rate futures on overnight interest rates.

Rupee internationalisation and capital inflows

The intent is to push for more settlement in rupees.

The RBI has been receiving requests from banks to consider a special concessional window for swapping Foreign Currency Non-Resident (“FCNR”) deposits. The RBI will offer such a window to the banks.

The current overseas borrowing limit of fifty per cent of the unimpaired Tier I capital will be raised to hundred per cent and the borrowings mobilised under this provision can be swapped with the RBI at the option of the bank at a concessional rate. These schemes will be open up to November 30, 2013.

Financial infrastructure

Retail credit – The RBI will promote the use of “Aadhaar”, the unique ID, in building individual credit histories.

Small and medium enterprises – The RBI will facilitate Electronic Bill Factoring Exchanges, whereby bills from Micro, Small, and Medium Enterprises (“MSMEs”) against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly.

Recovery – The RBI will focus on accelerating the working of Debt Recovery Tribunals and Asset Reconstruction Companies.

Non-performing assets – The RBI proposes to collect credit data and examine large common exposures across banks. This will help the creation of a central repository on large credits, which will be shared with banks.


Together with the government, the RBI will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by the end of November 2013.

The RBI will implement a national giro-based Indian Bill Payment System, such that households will be able to use bank accounts to pay school fees utilities, medical bills, and make person-to-person transfers electronically.

The RBI will facilitate the setting up of “white” point-of-sale devices and mini-ATMs by non-bank entities to cover the country so as to improve access to financial services in rural and remote areas.

The RBI will set up a Technical Committee to examine the feasibility of using encrypted SMS-based funds transfer using an application that can run on any type of handset. We will also work to get banks and mobile companies to cooperate in rolling out mobile payments.

(Deeksha Singh is part of the faculty on


Some questions about changes in the ODI regime

The new regulations will make Indian business houses like Tata think twice before making an investment like it did while acquiring Jaguar in 2008.
The new regulations will make Indian business houses like Tata think twice before making an investment like it did while acquiring Jaguar in 2008.
Image on the right is from syam’s photostream on Flickr and has been published under a CC BY 2.0 licence.

As part of its efforts to reign in flagging economic growth, the Reserve Bank of India (“RBI”) announced, in a press release issued on August 14, 2013, a few measures to curb overseas investment by Indian companies and individuals. Briefly, these include:

  • The reduction of the limit for overseas direct investment (“ODI”) under the Automatic Route for all new ODI transactions from 400% to 100% of the net worth of the Indian party;
  • The reduction in the limit for remittances made by individuals resident in India under the Liberalised Remittance Scheme from USD 200,000 to USD 75,000 per financial year; and
  • The prohibition of the use of the Liberalised Remittance Scheme for the acquisition of immovable property outside India, directly or indirectly.

Let us consider the implications of these changes. We can conclude that, effectively, the RBI will treat any ODI in new joint ventures or wholly owned subsidiaries in excess of 100% of the net worth of the Indian investor, as an ODI investment that needs RBI approval.

Existing JVs and WOS

Now, the notification states that these changes will apply prospectively and not to existing joint ventures or wholly owned subsidiaries (“JVs/WOS”) set up under the extant regulations. What does this mean? Can we conclude that Indian entities can continue to invest in existing JVs/WOS set up under the extant regulations up to the 400% net worth limit? This does seem to be conclusion if you consider the following statement from the notification:

These provisions shall come into effect with immediate effect and would apply to all fresh Overseas Direct Investment proposals on a prospective basis but would not apply to the existing JV/WOS set up under the extant regulations.

Or is the intent to restrict all new investments irrespective of whether the investment is into a new JV/WOS or an existing one?

Nature of investment

Another point of concern, especially when considering the press note from the perspective of financing transactions, is whether the limit applies to guarantees extended to JVs/WOS by Indian entities.

The source of this uncertainty is the following choice of words in the notification:

… the total overseas direct investment (ODI) of an Indian Party in all its Joint Ventures (JVs) and / or Wholly Owned Subsidiaries (WOSs) abroad engaged in any bonafide business activity should not exceed 400 per cent of the net worth of the Indian Party as on the date of the last audited balance sheet under the Automatic Route.

Contrast this with the prohibition laid out in the Master Circular on ODI:

The total financial commitment of the Indian party, in all the Joint Ventures / Wholly Owned Subsidiaries put together, shall not exceed 400% of the net worth of the Indian party as on the date of the last audited balance sheet.

Mergers-and-Acquisitions-LawIs this a deliberate distinction created by the RBI? Can we assume that the new 100% limit applies only to direct investment into the JVs/WOS and not to loans or guarantees extended by the Indian entity?

The answers to these questions can significantly impact the way in which acquisition and financing transactions are structured, and we can be sure that the RBI will need to clarify their position on ODI in the near future.

(Deeksha Singh is part of the faculty at