According to the definition provided by European Central Bank in its report titled “Virtual Currency Schemes” published in October 2012 –
“A virtual currency is 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.”
DEFINITION OF CURRENCY UNDER FEMA
Under Section 2 (h) of Foreign Exchange Management Act, 1999
It includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, Acts of exchange and promissory notes ,credit cards or such other similar instruments as may notified by Reserve Bank of India.
With respect to definition provided under FEMA, the proper authority to decide whether a particular instrument comes within the ambit of currency or not is Reserve Bank of India and till date Reserve Bank has not recognized virtual currency. Keeping its stand clear, the central bank of India made a statement that it won’t regulate the virtual currency ‘bitcoin’. It raised concern over the fact that virtual currency poses challenge in the form of regulatory, legal and operational risk. There is also an issue related to bitcoin that it is not issued by any central bank, neither has any central authority regulating the same. It is issued by an open source software through the process what is known as “Bitcoin Mining”. It is based on peer to peer system where currency is not issued but mined with computers having competent software for the same by cracking difficult puzzle type questions, equations or algorithm. According to an estimate with the popularity of bitcoin, there was increase in the number of cryptocurrencies in the market and is estimated to be more than 150 in number. The most popular among them based on popularity and wider acceptance are:
Value of virtual currencies:-
One of the most important aspects of fiat currency (rupee dollar euro) is that it is backed by the creditworthiness of the central bank and the government which is clearly not the case in virtual currency as we can see the enormous fluctuations in the value of bitcoins. They derive their value solely from the acceptance of the currency by the users. At present 1 bitcoin is equivalent to around 450 US Dollar.
Advantages of virtual currency:
- One of the best feature of virtual currency is that it can be bought and sold online and remitted abroad without having to pay any fees to a bank or other over charging financial intermediaries.
- Easy payment without cost of bank transactions for buying stuffs as many online retailers like Walmart and Amazon allow use of Bitcoins for making payments.
- Blockchain, which keeps the track of all bitcoin transactions is one of the reliable source to track down and monitor all the bitcoin transaction that has been made till date.
- It has removed cross border transactions issue because of the convenience it has provided with respect to transfer through bitcoin wallet.
- According to a paper on “Virtual Currency” published by International Monetary Fund”, it has focused on various issue which is still to be figured out with respect to virtual currencies which are:
- The major concern of high price volatility of virtual currency because the value of bitcoins keep fluctuating every now and then enormously and it is not the liability of the state to look into its fluctuations. Since bitcoins aren’t dependent on economic policies and from financial factors therefore it’s hard to forecast any changes that may take place in its value.
- It’s restricted use as medium of exchange because of no legal status, small size and it’s limited acceptance throws it out from the race of acceptance as a proper currency. Though in future it may see a new dawn because bitcoins are gaining popularity but it will still take time to gain trust of majority to become a medium of exchange.
- Also there are high chances of counterfeiting, tax evasion and financing to the terrorist due to unregulated nature of virtual currencies.
USAGE IN INDIA AND IT’S FUTURE:
According to an estimate there are around 30000 users of virtual currencies in India and there is estimated transaction of more than Rs. 200 crore every year in India made in virtual currencies. But looking at the central authority “ Reserve Bank of India” position on virtual currency it’s hard to say that it will be regulated by it in near future and accepted as a currency under FEMA. RBI has given several statement with regard to it’s position on virtual currency. In 2015 RBI governor warned about cryptocurrencies by saying that it can be involved in money laundering, tax evasion and terror funding. But giving a ray of hope it said that though it will not regulate these virtual currencies now but will look into it, study and understand it in order to look into the possibility of regulating it in near future. RBI has also appreciated the effort of “Blockchain” which track each and every transaction made in bitcoin up to date. 
With the advent in new technologies I believe that bitcoin and other virtual currencies has a lot of potential to become a medium of exchange. It solves many problem like storage, printing and removes the barriers in online payments by providing fees free transactions. In India we are progressing towards “Digital India “ which will further strengthen the stand of virtual currency but it needs to be regulated because technology are always vulnerable to misuse and as referred by RBI governor Mr. Raghuram Rajan that if these virtual currencies are left unregulated then it may lead to various issues as discussed above. Well only time can tell the status of virtual currencies but looking at it’s use and popularity in India and abroad it can be good alternative to fiat currencies which are in use today.
Author: Shivam Anand
3rd Year, B.A. LL.B. (Hons.), D.S. National Law University, Vishakhapatnam, India.
 http://www.investopedia.com/articles/investing/121014/5-most-important-virtual-currencies-other-bitcoin.asp last accessed on 6th May 2016
 IMF Staff Discussion Note: Virtual Currency and Beyond, Initial Consideration, January 2016, SDN/16/03
 http://articles.economictimes.indiatimes.com/2013-08-14/news/41409715_1_bitcoin-gox-virtual-currency last accessed on 6th May 2016