Finance Ministry warns investors against virtual currencies

New Delhi: The Finance Ministry on Friday cautioned that virtual currencies are not legal tender and such currencies have no protection.

Noting that there has been a phenomenal increase in recent times in the price of virtual currencies (VCs) including Bitcoin, in India and globally, it said 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," the Finance Ministry said in a statement.

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, it said.

The statement further said that users, holders and traders of VCs have already been cautioned three times, by the Reserve Bank of India about the 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 RBI has also clarified that it has not given any licence/ authorisation to any entity/ company to operate such schemes or deal with Bitcoin or any virtual currency, it said.

"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," it said.

Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes, it said, adding VCs are stored in a 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, it added.

"VCs are not backed by government fiat. These are also not legal tender. Hence, VCs are not currencies. These are also being described as 'Coins'," it said. There is, however, no physical attribute to these coins, it said.