Virtual currencies are like Ponzi schemes: Finmin warns investors

Virtual currencies don't have any intrinsic value and are not backed by any kind of assets.

The government on Friday cautioned investors to be wary of virtual currencies like Bitcoin, saying they are like Ponzi schemes with no legal tender and protection.

"There is a real and heightened risk of investment bubble of the type seen in Ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money.

“Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes," the finance ministry said in a statement.

VCs are stored in digital/electronic format, making them vulnerable to hacking, loss of password, malware attack etc which may also result in permanent loss of money, it said.

Noting that there has been a phenomenal increase in recent times in the price of virtual currencies (VCs) including Bitcoin, in India and globally, it said, the VCs don't have any intrinsic value and are not backed by any kind of assets.

"The price of Bitcoin and other VCs, therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their prices," it said.

Earlier in the day, Minister of State for Finance Pon Radhakrishanan in the Lok Sabha said the Department of Economic Affairs had constituted an inter-disciplinary committee to examine the existing global regulatory and legal structures governing Bitcoin; suggest the framework for regulation of Bitcoin if among others etc.

The committee has submitted its report which is under consideration of the government, the minister said in a written reply to the Lok Sabha.

The finance ministry statement further said that users, holders and traders of VCs have already been cautioned three times by the Reserve Bank of India (RBI) about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to by investing in Bitcoin or other such currencies.

The RBI from time to time has also clarified that it has not given any licence or authorisation to any entity to operate such schemes or deal with Bitcoin or any virtual currency, it said.

Besides, it said, the government or RBI has not authorised any VCs as a medium of exchange.

Further, the government or any other regulator in India has not given licence to any agency for working as exchange or any other kind of intermediary for any VC, it said.

"The government also makes it clear that VCs are not legal tender and such VCs do not have any regulatory permission or protection in India.

“The investors and other participants, therefore, deal with these VCs entirely at their risk and should best avoid participating therein," it said.

As transactions of VCs are encrypted they are also likely being used to carry out illegal activities, such as terror-funding, smuggling, drug trafficking and other money-laundering acts, it added.

"VCs are not backed by government fiat. These are also not legal tender. Hence, VCs are not currencies. These are also being described as 'Coins'," it said.

There is, however, no physical attribute to these coins, it said, adding, persons dealing in them must consider these facts and beware of the risks involved in dealing in VCs.

Photograph: Jim Urquhart/Reuters