Banking industry of India is trying to capatilise the benefits of information and communication technology (ICT). The same is not possible till the modern banking infrastructure is supported with appropriate legal framework in this regard. It has been reported that an integrated modern banking law for India in pipeline. Till now there is no sign of any such much need integrated banking law of India.
The Reserve Bank of India (RBI) is slow in this regard even though RBI has acknowledged risks of e-banking in India. Although RBI has recently directed that all banks would have to create a position of chief information officers (CIOs) as well as steering committees on information security at the board level at the earliest yet these recommendations have not been implemented by the banks.
This is so despite the fact that the Security and Risk Mitigation Measures for Card Present Transactions in India have been brought into force by RBI. According to the Circular numbered RBI/2013-14/296, DPSS (CO) PD No.719/02.14.011/2013-14, issued on September 27, 2013, RBI has finally brought into force the mandatory provisions of the circular numbered DPSS.PD.CO.No.513 / 02.14.003 /2011-2012 dated September 22, 2011 on security issues and risk mitigation measures related to Card Present (CP) transactions and circulars DPSS (CO) PD No.1462 / 2377/ 02.14.003/2012-13 dated February 28, 2013 and June 24, 2013 respectively on security and risk mitigation measures for electronic payment transactions, wherein various timelines were indicated for compliance.
Indian banks are poor at cyber security implementation and even this measure of RBI would fail to achieve the desired objectives. While these measures are still waiting to be implemented by Indian banks, RBI is Exploring Use of Encrypted SMS Based Fund Transfers in India. However, India is not ready for Mobile Governance and the Mobile Payments Cyber Security in India is needed before implementing such ambitious initiatives.
All these factors would play a decisive role in the implementation or non implementation of any virtual currency scheme applicable in India. The Financial Stability Report by Reserve Bank of India (RBI) June 2013 (PDF) is another significant report regarding virtual currency schemes in India.
The report indicates that alongside the rapidly increasing use of technology in banking and finance in recent years, the risks emanating from abuse and failure of technology have also risen. The recent cases of cyber frauds at some banks have highlighted the increasing complexity, sophistication and diversity in the risks to the security and integrity of technology based banking and finance. Globally, the use of online and mobile technologies is driving the proliferation of virtual banks, virtual currencies and provision of banking and payment services by unlicensed entities. While leveraging on technology has resulted in many benefits, especially, in extending the reach of the financial services, these developments pose challenges in the form of regulatory, legal and operational risks.
One of the main risks related to the information technology (IT) systems in banks relates to the obsolescence of the technology and processes built according to the needs of the then prevailing regulatory-cum-business environment. Therefore, a review of suitability of the existing IT infrastructure is required to be carried out to assess the capability of the IT systems to handle the changing demands of business and compliance functions in the evolving environment.
According to the document titled Virtual Currency Schemes by European Central Bank October 2012 (PDF), a virtual currency can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. The virtual currency schemes provide a financial incentive for virtual community users to continue to participate and are able to generate “float” revenue for their owners. They also provide a high level of flexibility regarding the business model and business strategy for the virtual community.
There are different kinds of virtual currency schemes in vogue at present. While for some kinds of virtual currencies there is no interaction or exchangeability with the “real” currency, for others the relationship with the real money, goods and services is more active and direct. The “closed” virtual currency schemes, which are mostly used in online games, have no connection with the real money. Some virtual currency schemes offer the facility of a (mostly unidirectional) conversion rate for purchasing the virtual currency, which can subsequently be used to buy virtual goods and services. Under another category of virtual currency schemes which provide for bidirectional flows, the virtual currency acts like any other convertible currency, with two exchange rates (buy and sell). In such schemes, the virtual currency can be used to buy not only the virtual goods and services, but also to purchase real goods and services. Virtual currency schemes are different from electronic money schemes as the virtual currency being used as the unit of account has no physical counterpart with legal tender status.
A virtual currency scheme may also be designed to compete with traditional currencies used for international trade. The absence of a distinct legal framework implies that the traditional rules under financial sector regulation and supervision, including the institution of central banks, are not involved in the case of virtual currency. Also, the unregulated link between virtual currency (if permitted), and traditional currency with a legal tender status poses challenges as the complete control over the differently denominated virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will.
The regulators are studying the impact of online payment options and virtual currencies to determine potential legal, regulatory and other risks associated with them.