Ministry of Finance has issued yet another warning against investing in bitcoin and cryptocurrencies. Earlier, RBI has issued 3 warnings (Dec, 2013; Feb, 2017 and Dec, 2017). For the first time, however, the government has called it a 'Ponzi scheme'. "Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes," says the statement. This raises a whole host of questions:
Should you exit bitcoin/cryptocurrencies?
If you have the appetite to take the losses and the profits, stay invested. If you cannot withstanding the wild gyration in prices, it's best to exit.
Exchanges offering trading in the 1000-odd cryptocurrencies may not be licensed but they are not illegal. They fall in the category of 'unregulated' industry. Regulations always lag behind such industries. Hence, it's not illegal to trade in bitcoins/cryptocurrencies as long as you pay your taxes on your gains as per your tax slab. Incidentally, all exchanges already pay GST on the transaction charges.
What is the status of bitcoin/cryptocurrencies?
Worldwide, a bitcoin/cryptocurrency is either a currency, a commodity or a financial instrument. In India, regulation has fallen through the cracks between the banking regulator RBI, the stock markets regulator Sebi and the commodities regulator Forward Markets Commission. The government has finally decided to regulate Bitcoins and other cyptocurrencies.
While regulation is good, the plan appears faulty. Since RBI has failed to recognise it as a currency, which it ought to be, it is likely to be called an asset. That would be a disaster. Bitcoin and other cryptocurrencies were always intended to be currencies. They are already integrated into the formal system as a mode of payment. Hence, they ought to be defined as currencies and treated like one. Calling them assets would be contrary to their current usage.
Are bitcoin exchanges licensed?
No, there is no licensing of cryptocurrency exchanges in India. No authority or regulator has issued them any licence.
What is the ministry of finance's warning?
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.
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.
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.
What is RBI's warning?
The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities. As such, they may pose several risks to their users, including the following:
VCs being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc.
There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.