Page 25 - Banking Finance January 2022

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vulnerability in their systems that were exploited by the
attackers.

A transaction is requested

The transaction is broadcased to a P2P network that
consists of computers (nodes)

The network of nodes uses known algorithm to validate
the transaction and user's status

A verified transaction can involve cryptocurrency,
contracts, records, or other information
Use of cryptocurrencies to transact funds internationally can
The transaction is combined with other transactions, once be compared with Hawala transactions. Hawala
verified, to create a new block of data for the ledger Transactions operate outside the jurisdiction of Traditional
Banking System. It was originated in India and the transfer
of money takes place between Hawala dealers or
The new block is added to the existing blockchain (which is 'Hawaladars'.
permanent and unalterable)

To explain Hawala transaction in brief; if a person wants to
send money abroad, instead of going through the traditional
The transaction is completed
banking system, the person can contact a 'hawaladar' who
contacts the other hawaladar sitting in the intended country
Reserve Bank of India's stance on and directs him/her to deliver the money to the final
destination. The entire system of Hawala works on trust and
Cryptocurrency is more cost effective, efficient and most importantly does
Central Banks across the world have a different take on not leave any paper trail which makes it a perfect source of
cryptocurrencies but all of them share a single view point money laundering. Hawala transactions are completely
on the possibility of using cryptocurrencies for terrorist illegal in India and Pakistan.
financing and Money Laundering.
In response to RBI, the cryptocurrency exchanges argued
RBI on 6th April 2018 had issued a circular directing entities that RBI has no power to ban trading in virtual currencies
regulated by RBI to not deal in virtual currencies. Also since they are not a legal tender and are not included in
ordered to stop providing services and terminate the credit system of the country. Also, virtual currencies do
relationships with entities dealing in virtual currencies. This not satisfy the characteristics for it to be termed as money,
order was challenged in court by various parties who had namely - Mediumof Exchange, Unit of Account and Store of
vested interest in cryptocurrencies.While defending its order Value. Hence, cryptocurrencies fall outside the jurisdiction
in court RBI cited a paragraph from the 2015 Report on of the Central Bank's power to regulate it.
'Emerging Terrorist Financing Risks' by FATF which in brief
mentioned that Virtual Currencies such as bitcoin present Another point raised by the virtual currency exchanges is
a great opportunity for financial innovation but at the same that RBI classifies all the cryptocurrencies as anonymous
time allows anonymous transfer of funds internationally. This whereas most of the cryptocurrencies are 'pseudo-
has attracted attention of many criminal organisations and anonymous', which is also acknowledged by the European
pose a threat for Terrorist Financing. Parliament. Pseudo anonymity means that identities on the

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