The Finance Ministry’s warning to potential investors in bitcoin and other cryptocurrencies has come at a time when a new, seemingly attractive investment area has opened up that few have enough information about. The price of bitcoin , the most popular of all cryptocurrencies, not only shot up by well over 1000% over the course of the last year but also fluctuated wildly. One of the main reasons for this volatility is speculation and the entry into the market of a large number of people lured by the prospect of quick and easy profits. The government’s caution comes on top of three warnings issued by the Reserve Bank of India since 2013. Investment in bitcoin and other cryptocurrencies increased tremendously in India over the past year, but most new users know close to nothing of the technology, or how to verify the genuineness of a particular cryptocurrency. A number of investors, daunted by the high price of bitcoin, have put their money into less well-established and often spurious cryptocurrencies, only to lose it all. Even some private cryptocurrency operators in India have gone on record saying that as many as 90% of the currencies are scams.
The use value of cryptocurrencies — both as a medium of exchange and as a store of value — is still being explored. Global tech firms such as IBM are developing their own cryptocurrency platforms to speed up cross-border transactions in a secure and transparent manner. At the same time, countries like South Korea and the U.S. are intensifying regulatory scrutiny of the market. South Korea, where bitcoin became something of a craze, recently proposed legislation to either heavily regulate exchanges or ban them. In the U.S., in November, a court ordered a popular cryptocurrency platform to hand over information related to 14,000 accounts to the Internal Revenue Service, undermining the anonymity the digital currencies offer. In all this, India must be careful to differentiate between cryptocurrencies and the blockchain technology they are based on. Cryptocurrencies may or may not emerge as a useful tool, especially since the government may not want to encourage the proliferation of anonymous, non-fiat currencies as its anti-black money fight intensifies. But blockchains, basically digital ledgers of financial transactions that are immutable and instantly updated across the world, are worth looking at as aids to ease doing business. They have the potential to greatly streamline payment mechanisms and make them transparent. As Ajay Tyagi, Chairman of the Securities and Exchange Board of India, said, blockchain technology is useful and should not as yet have regulatory oversight. The inter-ministerial panel on cryptocurrencies will take a call on their future. Meanwhile, the government is correct in underscoring the ‘caveat’ in caveat emptor.
