India likens cryptocurrencies to Ponzi scheme, cautions investors

NEW DELHI (Reuters) - The finance ministry on Friday cautioned investors about the risks of trading in cryptocurrencies such as bitcoin, saying digital currency investments are like "Ponzi schemes."

Cryptocurrencies are not legal tender and have no regulatory permission or protection in the country, the finance ministry said in a statement, but stopped short of announcing an outright ban or imposing any curbs.

Investors and other participants dealing with such digital currencies are doing so "entirely at their risk and should best avoid participating therein," the statement said.

"There is a real and heightened risk of investment bubble of the type seen in Ponzi schemes", with investors risking a sudden and prologed crash, the statement said.

A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.

The ministry also cautioned that encrypted transactions in cryptocurrency were likely being used for illegal activities such as "terror-funding, smuggling, drug trafficking and other money laundering acts."

India currently has no regulation for cryptocurrencies, and like other global policymakers, it is seeking to understand how to supervise a market that many feel is a speculative bubble.

"Mere issuance of an advisory is not sufficient when thousands of people have lost money in cryptocurrency," said Pavan Duggal, a cyber expert and a lawyer with the Supreme Court.

"Government has the sovereign duty to come up with a legal framework to regulate the cryptocurrencies and protect genuine investors," he said.

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

Bitcoin, the world's biggest and best-known cryptocurrency, has gained more than 19-fold this year.

Digital currencies are very popular across Asia, with many retail investors giving up their daily jobs to trade them full time in countries such as Japan and South Korea, which together make up for more than half the global trading volumes by some estimates.

On Thursday, South Korea's government said it would impose additional measures to regulate speculation in cryptocurrency trading within the country.

(Reporting by Malini Menon and Manoj Kumar; Editing by Shri Navaratnam)