As the RBI watches over the BitCoin in an attempt to gather information about the virtual currency before regulating the same, various countries around the world, including economic powerhouses like China have banned the same and the United States has acknowledged the need to formulate a regulation to govern the same.

BitCoin, which unlike conventional money is bought and sold on a peer-to-peer network independent of any central authority, is a four-year-old virtual currency that isn’t backed by a central bank and can be traded on a number of exchanges or swapped privately. Fueled by investor views that it has a credible future as an alternative currency, its price has skyrocketed in recent weeks and it has become the most expensive currency in the world. A number of merchants are accepting BitCoin as payment because the transaction costs associated with the currency are lower than those with credit or debit cards and it is considered to be a safer alternative to online payments as using BitCoins is more secure, as it involves a private key and the BitCoin transactions are untraceable, heavily reducing the risk of fraud, phishing.

This popularity, creation, operation and exchange of BitCoins has raised concerns among law-enforcement authorities that digital currencies could be used for laundering money, evasion of taxes, nonreporting of income, hoarding of coins, hacking, cyber theft, financing of terrorism etc. and has raised the need for a regulation of the same.

In absence of an established framework for recourse before customers and in the absence of a regulation or a SEBI guideline strictly governing virtual currency or bitcoins in India, the same can be brought, for the time being, under the ambit of the Payment Systems and Settlement Act, 2007, its corresponding rules and the Draft Guidelines for issuance and operation of Prepaid Payment Instruments in India which under regulation 3.2 allows only banks authorised by the RBI to provide Mobile banking transactions.

Under the Payment Systems and Settlement Act, a restrictive and regulatory law, The default position with regard to commencement or operation of a payment system is that it cannot be done without authorisation issued by the Reserve Bank.

A Payment System, defined under Section 2 (1), has a very broad definition and all systems except stock exchanges and clearing corporations set up under stock exchanges carrying out either clearing or settlement or payment operations or all of them are regarded as payment systems. Hence, operation of BitCoins may also be brought under its ambit and Section 5 of the Act provides that any person desirous of commencing or carrying on a payment system may apply to the Reserve Bank for an authorization under this Act. Therefore, since BitCoins act as a virtual currency and carry out payment or settlement actions in order to legally operate the BitCoin business in India an authorisation needs to be taken from the RBI prior to its commencement.