There has been a flurry of central bank activity recently spewing advice and cautioning citizens about virtual currencies like Bitcoin.

First, it was PBOC and now the recently, the Reserve Bank of India (RBI), India’s central bank has come up with a press release that warns Indians about the dangers of dabbling in virtual currencies.

RBI cautions holders and traders of Bitcoin

On Feb. 1, 2017, the Reserve Bank of India posted a  brief press release on their website saying, “The Reserve Bank of India had cautioned users, holders and traders of Virtual Currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to, vide its press release dated Dec. 24, 2013. The Reserve Bank of India advises that it has not given any license/ authorization to any entity/ company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.”

As is clear from the central bank’s communique, they had also earlier issued a similarly worded caution way back in 2013.

The timing is the key

What is interesting to note about the press release by the Indian central bank is the timing. The Reserve Bank carried out a botched demonetization on Nov. 8, 2016, which wiped out 86 percent of the circulating currency in India. Indian citizens had to endure months of pain afterward and there was a renewed interest in Bitcoin.

In fact, Bitcoin is extracting a premium in India, at the time of the writing of this article 1 BTC was worth $1041 on Poloniex but on the Indian Bitcoin exchange ZebPay 1 BTC was worth INR$72,790 or $1080 approx.

Recently the government of India presented its Union Budget and the Indian finance minister announced further curbs on cash which included a 100 percent penalty on cash usage above Rs.$300,000. This warning on Bitcoin comes just days after the penalty was announced.

Bitcoin is not illegal in India

It should be absolutely clear to anyone who is using Bitcoin in India that the usage of Bitcoin is not in violation of any of the country’s laws and the Reserve Bank notice does not affect Bitcoin or any other virtual currency adversely.

We talked with Kumar Gaurav, CEO who says, “There is no major impact of this comment. Average consumers are still not involved in Bitcoin in India, yes a little pro consumers with extra cash are only looking for an alternate investment which can be highly liquid. And as they are pro, they know what they are doing and are willing to take risks.”

RBI wearing its Capital Control Hat

India has very strict capital controls in place. The infamous Foreign Exchange Management Act (FEMA) imposes several restrictions on resident Indians who can’t hold foreign exchange in cash beyond $2000, in such times Bitcoin may be attractive to certain Indians who may not want to be subject to India’s cash limits or store their wealth in a depreciating rupee that has lost nearly half its value since March 2011 against the dollar.

So the RBI warning may also be the central bank exercising its capital control duties as Kumar Gaurav points out, “RBI has many responsibilities than just printing currencies and one of them is capital control measures.  India has strict capital control rules and anything which will make it weaker, obviously not accepted by the central bank. But at the same time, India does not want to kill innovation; it does not want to ban cryptocurrencies - it wants to understand its effect more closely.”

While the RBI may have been cautionary in its approach, the truth is that nothing has changed in India when it comes to Bitcoin or other cryptocurrencies except the fact that the central bank’s own actions have spurred more interest in alternatives to the Rupee.