New Delhi: The ministry of finance on Friday cautioned people against the risks of investing in virtual currencies such as Bitcoin that are not backed by government fiat, and compared them with Ponzi schemes.

This follows a crackdown by South Korean government on trading of bitcoins which led to a 8% drop in its value on Thursday. Currently, the value of bitcoin is around $15,000. The rapid rise in the value of the virtual currency this year has attracted the attention of not just speculators but also unsophisticated retail investors who often do not understand the risks involved. The virtual currency was valued at $1,276 on 2 January.

“There has been a phenomenal increase in recent times in the price of virtual ‘currencies’ (VCs) including Bitcoin, in India and globally. 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 prices," the ministry said in a statement.

Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi on 20 December said the virtual currency so far has not posed any systemic risk, but added that it can no longer be ignored.

However, he said there should not be any regulatory oversights on the Blockchain technology used in bitcoins, saying this is a useful technology which should be encouraged. “Blockchain technology that everyone uses and is useful should not have regulatory oversight, and that’s something that needs to be encouraged," he said.

The finance ministry warned that there is a real and heightened risk of investment bubble in VCs of the type seen in ponzi schemes which can result in a sudden and prolonged crash, exposing investors, especially retail consumers who stand to lose their hard-earned money. “Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes," it added.

VCs 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, the finance ministry said. “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 cautioned.

The finance ministry said the users, holders and traders of VCs have already been cautioned three times, in December 2013, February 2017 and December 2017, by the Reserve Bank of India (RBI) 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.

“RBI has also clarified it has not given any licence/authorization to any entity/company to operate such schemes or deal with Bitcoin or any virtual currency. 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 added.

In April, the government formed a panel under Dinesh Sharma, special secretary in the economic affairs department, to study the existing framework for virtual currencies such as Bitcoin. Though the panel has submitted its report, the government is yet to make its recommendations public.

The panel was asked to take stock of the present status of virtual currencies both in India and globally, examine existing global regulatory and legal structures governing them, suggest measures on consumer protection and examine any other relevant matter related to virtual currencies.

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