Govt says cryptocurrencies are Ponzi schemes, cautions investors

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In a new statement issued December 29, India's Ministry of Finance warned residents against the risks associated with trading cryptocurrencies, going so far as to compare blockchain-based assets like bitcoin to "Ponzi schemes".

It must be noted that Ponzi schemes are completely illegal, while Bitcoin and other cryptocurrencies were so far understood to belong to an uncharted territory, neither legal nor illegal.

In his statement, the Finance Ministry said that there is no natural value of virtual currency like Bitcoin.

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

Noting that VCs are stored in digital format, the ministry said this makes them vulnerable to mishaps like hacking, loss of password and malware attack "which may also result in permanent loss of money".

"VCs are not backed by government fiat". Hence, virtual currencies are not currencies. These are also being described as "coins".

"The investors and other participants therefore deal with these VCs entirely at their risk and should best avoid participating therein". As such transactions are encrypted, they are also likely being used to carry out such as terror-funding, smuggling, drug trafficking and other money-laundering acts. Despite being referred to as "coins", virtual currencies do not have any physical attributes and can not be considered coins either, the document says. The major concern for the governments has been the lack of the solid base for these virtual currencies which are not bolstered by any asset reserves.

Earlier this month, the Reserve Bank of India (RBI) warned public that it has not given any licence to anyone to operate such virtual currencies.

India's Supreme Court has previously urged various government agencies to respond to an online petition that demands a proper regulation over bitcoin.

"Persons dealing in them must consider the facts and beware of the risk involved in dealing in VCs", the ministry said. The schemes work in a way where the initial investors are given exemplary returns by the amount of money that is generated from the ongoing stream of newer investors who are falling into the pitfall of financial malpractice.

The news brought Bitcoin price down 7 per cent yesterday. However, today's statement by the Ministry of Finance can be seen as a dampener for Bitcoin enthusiasts, traders and investors in India.

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