The government has joined the Reserve Bank of India in cautioning potential customers about investing in cryptocurrencies like bitcoin, likening them to ponzi schemes where investors risk losing their money.
“There has been a phenomenal increase in recent times in the price of virtual ‘currencies’ (VCs) including Bitcoin, in India and globally,” the Finance Ministry said in a statement on Friday.
‘No intrinsic value’
“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 added. “Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes.”
Private sector cyrptocurrency players agree with the Finance Ministry’s call for caution, adding that the bulk of the cryptocurrencies in the market are not reliable.
“The Finance Ministry’s statement makes total sense,” Kumar Gaurav, CEO of Cashaa told The Hindu . “Because, right now, Bitcoin has not gained enough trust. It is still exotic and difficult to understand exactly what it is, either for the Finance Ministry or the Enforcement Directorate or tax authorities.”
“It becomes more challenging for us to build a credible image,” Ashish Agarwal, founder of Bitsachs said. “I won’t say the Finance Ministry is wrong. Apart from the major currencies like Bitcoin, about 90% of the other currencies are scams. It is the responsibility of the Finance Ministry to warn consumers.”
The government added that since VCs are stored in an electronic format, this makes them vulnerable to hacking, loss of password, malware attacks, etc, which could also result in a 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,” the statement said.
Mr.Gaurav also said that the price fluctuations in Bitcoin over the last few months show the extent of speculation and market manipulation taking place.
“The way the market has been reacting for the past six months, it is very clear that there has been speculation and market manipulation at work,” Mr. Gaurav said. “In the current window of three months, I would strongly go with the Finance Ministry’s warning. It is the right time for people to take a break and rethink their investments.”
The Reserve Bank of India has issued three warnings, two of them this year, about the potential financial, operational, legal, customer protection, and security related risks associated with investing in virtual currencies.
