Centre cautions investors on risks of dealing with virtual currencies

Taking cognisance of the recent rising popularity of investing in virtual currencies (VCs) like Bitcoins, the Ministry of Finance issued a statement on Friday, cautioning investors regarding risks of dealing with cryptocurrencies.

Linking them to 'ponzi schemes', the ministry argued that unlike others, virtual currencies have no intrinsic value and are not backed by any kind of assets. The price of Bitcoin and other VCs, therefore, is entirely based on speculation, which results in spurt and volatility in their prices.

In terms of storage, the statement noted that since they are in the digital/electronic format, they tend to be more vulnerable to hacking, loss of password, malware attack, and so on, which may result in permanent loss of money. 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 money-laundering acts, the Ministry claimed.

While VCs have no official backing by any Government fiat, they are also not legal tender, and hence cannot be categorised as currencies. The ministry noted that while these are being described as 'coins', there is no physical attribute to these coins. Therefore, VCs are neither currencies nor coins.

Further, the ministry clarified that the Government or Reserve Bank of India (RBI) has not authorised any VCs as a medium of exchange. Also, no regulator has given license to any agency for working as an exchange or any other kind of intermediary for any VC. Persons dealing in them must consider these facts and beware of the risks involved in dealing in VCs, the Ministry warned.

This is the not the first warning of its kind that has been issued. The users, holders, and traders of VCs have already been cautioned three times, in December 2013, February 2017 and December, 2017, by the RBI about potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to by investing in Bitcoin and/ or other VCs.

The central bank had also clarified that it has not given any license or authorisation to any entity/company to operate such schemes or deal with Bitcoin or any virtual currency.

"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," the statement read.

For the unversed, Bitcoins are a part of a rising new genre of digital payments called 'cryptocurrencies' that work on blockchain technology with no centralised administrator.

This virtual currency emerged in the aftermath of the financial crisis and allows people to bypass banks and traditional payment processes to pay for goods and services.

Bitcoin was created in 2009 by a person using the alias Satoshi Nakamoto. The acquiring of bitcoins is hassle-free as several marketplaces called "bitcoin exchanges" allow people to buy or sell it using different currencies.

Mt. Gox is the largest bitcoin exchange.