The Union government on Friday cautioned investors against trading in cryptocurrencies like bitcoin, and likened such investments to “Ponzi schemes”.
“The VCs [virtual currencies] 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… Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes,” the finance ministry said in a statement on Friday.
Experts said the government was taking a cautious stance against the use of cryptocurrencies, and suggested a need for regulations to monitoring such transactions.
“There is definitely the potential of cryptocurrencies being used as Ponzi schemes, but the government shouldn’t go against an evolving technology. We need to plug the loopholes. We need strong regulations and will have to ensure that all bitcoin dealers in India have to register with the RBI and all the transactions are traceable,” said Rohinton Sidhwa, partner, Deloitte, Haskins & Sells LLP.
Raising concerns, the finance ministry said there was a “real and heightened risk of investment bubble” as witnessed in the Ponzi schemes, which could affect investors, especially retail consumers, who might lose money due to the risk involved in digital currency investments. Virtual currencies, it said, were stored in digital or electronic format, making them vulnerable to hacking, loss of password, malware attack etc, which might also result in the permanent loss of money, it said.
While stating that virtual currencies were not a legal tender, and were neither currencies nor coins, the government clarified that none of the regulators had given a licence to any agency for working as an exchange or any kind of intermediary for any virtual currency.
“The investors and other participants, therefore, deal with these VCs entirely at their risk and should best avoid participating therein,” the ministry added. Naveen Wadhwa of Taxmann said cryptocurrencies were not Ponzi schemes in the actual sense of term, as the latter involved giving initial entrants huge returns if they made members, which was not the case with cryptocurrencies. However, the intent of the government was that virtual currencies had huge risks on the lines of Ponzi schemes, he added.
The Reserve Bank of India (RBI) has issued three warnings against investments in cryptocurrencies — one each in December 2013, February 2017, and earlier this month. “The government also makes it clear that VCs are not a 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.
Minister of State for Finance Pon Radhakrishanan said in a written reply in the Lok Sabha that the Department of Economic Affairs had constituted an inter-disciplinary committee to examine the existing global regulatory and legal structures governing bitcoin. The government was examining the committee’s report that suggested a framework for the regulation of bitcoin, the minister added.