Economy

India likens cryptocurrencies to Ponzi schemes

India likens cryptocurrencies to Ponzi schemes

The finance ministry has cautioned investors about the risks of trading in the so-called cryptocurrencies such as Bitcoin, saying that investments in digital currency that have no intrinsic value or institutional backing are like investing in "Ponzi schemes".

The warning comes a day after South Korea, a global hub for bitcoin trading, said it would ban anonymous cryptocurrency trading due to the "abnormal situation of speculation". The value of Virtual Currencies is based on speculations which results in volatility in their prices. There is a real and heightened risk of investment bubble of the type seen in Ponzi schemes.

The ministry noted that India now has no regulatory framework to protect investors who purchase cryptocurrencies and cautioned that investors who want to trade them do so "entirely at their risk". It said crypto-currencies or virtual currencies including bitcoin don't have any intrinsic value and are not backed by any kind of assets.

A Ponzi scheme is a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

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The Indian government said those trading in them may become victims of cyber crimes as digital money units were stored in electronic format, making them vulnerable to hacking, loss of password and malware attack. The Government or Reserve Bank of India (RBI) has not authorised any VCs as a medium of exchange.

"As transactions of VCs are encrypted they are also likely being used to carry out illegal/subversive activities, such as, terror funding, smuggling, drug trafficking and other moneylaundering acts", it said.

"VCs are not backed by Government fiat".

"VCs are neither currencies nor coins".

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Pon Radhakrishnan, state finance minister in the Lower House of India's Parliament, revealed earlier on Friday that the Department of Economic Affairs had set up a special committee to assess the current global regulatory framework for Bitcoin.

Bitcoin values in NY, for instance, have soared almost 1,600 per cent over the past year and now range upwards of $15,000.

Amid repeated calls for caution, the price of Bitcoin plummeted to below USD11,000 on December 22, just days after futures trading in the cryptocurrency began in Chicago exchanges.

Last week, capital market regulator Sebi said it was in talks with the government and central bank on how to regulate cryptocurrencies.

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