business

Updated: Dec 29, 2017 11:28 IST

The ministry of finance on Friday cautioned people against the risks of investing in virtual currencies such as bitcoin which lack government fiat, comparing 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 $14,000.

“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 their prices,” the ministry said in a statement.

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 sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money. “Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes,” it added.

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, 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 that 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.