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Bitcoin risks: Government warns against cryptocurrency, says don't get trapped

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 Finance Ministry said.

twitter-logo BusinessToday.in        Last Updated: December 29, 2017  | 15:22 IST
Bitcoin risks: Government warns against cryptocurrency, says don't get trapped

Weeks after the Reserve Bank of India issued its third warning against the cryptocurrency trading, the Finance Ministry today said that virtual currencies are not legal tender and such currencies have no protection. It said the virtual currencies (VCs) including Bitcoin 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 Ministry also said that there was 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. "Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes," the statement said.

The Ministry also explained the vulnerabilities in investing in digital currencies. It said the virtual currencies are stored in digital/electronic format, making them vulnerable to hacking, loss of password, malware attack which may also result in permanent loss of money. "As transactions of VCs are encrypted they are also likely being used to carry out illegal and subversive activities, such as, terror-funding, smuggling, drug trafficking and other money-laundering Acts," the Ministry said.

The Finance Ministry today reiterated that the government or the RBI has not authorised any Virtual Currencies as a medium of exchange. It also made it clear that the government or any other regulator in India has not given license to any agency for working as exchange. It said: " Virtual currencies are not backed by government fiat. These are also not legal tender. Hence, VCs are not currencies. These are also being described as 'Coins'. There is however no physical attribute to these coins. Therefore, VC  are neither currencies nor coins."

This may be the first official warning from the government, the Central Bank on three different occasion cautioned the users, holders and traders about the potential financial, operational, legal, customer protection and security related risks that they were exposing themselves to by investing in Virtual Currency including Bitcoin. Earlier this month, the RBI clarified that it has not given any licence/ authorization to any entity/ company to operate or deal with Bitcoin or any virtual currency.

Today, the government also made 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 such currency entirely at their risk.

The Indian government and RBI are not the only ones to caution investors against crypto currency. Leading financial analysts and economist have also raised red flag against it. Business magnet Warren Buffett called it a 'real bubble'. Garrick Hileman, a research fellow at the University of Cambridge's Judge Business School, earlier said: "What's happening right now has nothing to do with Bitcoin's functionality as a currency - this is pure mania that's taken hold."

 

 

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