Bitcoins, other virtual currencies like Ponzi schemes: FinMin

New Delhi: In a strongly worded warning against investing in virtual currencies like Bitcoin, the government on Friday said these currencies were like “ponzi schemes” and there was a “real” risk of people “losing their hard-earned money”.

“Virtual currencies (VCs) are not backed by government fiat. These are also not legal tender. Hence, virtual currencies are not currencies. These are also being described as ‘coins’. There is however no physical attribute to these coins,” said a statement by the finance ministry. It underlined that “virtual currencies” are neither currencies nor coins, they have no intrinsic value and are not backed by any kind of assets.

The Indian government’s statement comes after South Korea said it was planning a crackdown on trading in the digital currency which has hit record high value in 2017. Bitcoin surged by more than 900 per cent in value in 2017, which has raised fears of a bubble around countries.

“The government or the Reserve Bank of India has not authorised any virtual currencies as a medium of exchange. Further, the government or any other regulator in India has not given license to any agency for working as exchange or any other kind of intermediary for any virtual currencies,” the finance ministry’s statement said.  

It pointed out that people dealing in them must consider these facts and beware of the risks involved in dealing in virtual currencies.

“The users, holders and traders of virtual currencies have already been cautioned three times, in December 2013, February 2017 and December 2017 by 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 virtual currencies,” said the ministry.

It pointed out that the RBI has also clarified that it has not given any licence/authorisation to any entity/company to operate such schemes or deal in Bitcoin or any virtual currency. “The government also makes it clear that virtual currencies are not legal tender and such virtual currencies 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,” said the ministry.

“There has been a phenomenal increase in recent times in the price of virtual ‘currencies’ (VCs), including Bitcoin, in India and globally. The virtual currencies don’t have any intrinsic value and are not backed by any kind of assets. The price of Bitcoin and other virtual currencies therefore is entirely a matter of mere speculation resulting in spurt and volatility in their prices,” said the statement.

It said that 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, to losing their hard-earned money.

“Consumers need to be alert and extremely cautious as to avoid getting trapped in such ponzi schemes. Virtual currencies 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,” it said.

The finance ministry pointed out that as transactions of virtual currencies 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.