The panel is also examining pros and cons including launching an own cryptocurrency.
Addressing the '2nd Global Summit P2P Digital Asset System,' organised by ASSOCHAM, Additional Secretary in the Department of Legal Affairs Anadee Nath Mishra said the government is also looking into the allegations that people who had black money had diverted the same to cryptocurrencies in India during demonetisation.
It was reported that during the period of demonetisation, some people used illegal money in bitcoins and that is believed to be the main factor behind the sudden increase in the prices of bitcoins.
The government is also examining the use of black money, a press release issued by the industry body quoted Mishra as saying.
There has been a phenomenal increase in recent times in the price of virtual currencies (VCs) including bitcoin, in India and globally.
The VCs don't have intrinsic value and are not backed by any kind of assets. The price of bitcoin and other VCs therefore is a matter of mere speculation resulting in spurt and volatility.
There is real risk of investment bubble of the type 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, Mishra was quoted as saying.
The VCs are stored in digital or electronic format, making them vulnerable to hacking, loss of password, malware attack, which may also result in permanent loss of money.
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, Mishra said.
He said there were reports that people who couldn't convert their money use this channel to launder their illegal money and it could have been one of the reasons for sudden rise in the value of bitcoins.
The Income Tax (IT) department has also carried out enquiries and notices have been given to a number of people who have transacted in bitcoins.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)