Govt says cryptocurrencies are Ponzi schemes, cautions investors

The finance ministry has cautioned investors about the risks of trading in the so-called cryptocurrencies such as Bitcoin, saying that investments in digital currency that have no intrinsic value or institutional backing are like investing in ''Ponzi schemes.''

Cryptocurrencies are not legal tender and have no regulatory permission or protection in the country, the finance ministry said in a statement.

''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 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. 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,'' the statement read.

Emphasising the risk and illegality involved in Bitcoin trading, the finance department said, ''Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes. 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. 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.''

While the ministry did not make any hint of an outright ban or imposing any curbs on these, the ministry said investors and other participants dealing with such digital currencies are doing so ''entirely at their risk and should best avoid participating therein.''

''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 ministry stated.

Ponzi schemes generally offer unusually high returns, with early investors paid off with money from newer investors, but those newer investors hoping to gain from still newer investors never make it.

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.''

While the Reserve Bank of India has been warning investors against these unregulated cryptocurrencies, there has not been any ban or regulation on trading in these currencies.

Last week, capital market regulator Sebi said it was in talks with the government and central bank on how to regulate cryptocurrencies. But any regulation of these  currencies would be seen as a recognition of their value.

Digital currencies are very popular across Asia, with countries such as Japan and South Korea together making up for more than half the global trading volumes by some estimates.

But, on Thursday, South Korea's government said it would impose additional measures to regulate cryptocurrency trading within the country, leading to speculation of an outright ban on its trading.

The news brought Bitcoin price down 7 per cent yesterday. Since then, Bitcoin price has partially recovered, gaining almost $1,000 today. The Indian finance ministry's statement can be a dampener for Bitcoin enthusiasts, traders and investors in India.