In a contest between common sense and greed, it's invariable the latter that wins, and that is why so many retail investors have repeatedly fallen prey to dubious flashy schemes promising risk-free big money. This despite regular reportage of horror stories like the Sahara scam and the Saradha chit fund fraud, which collectively filched over Rs 60,000 crore from investors. And this makes the ongoing Nirav Modi-PNB fraud saga seem tiny in comparison.
So striking a big one on behalf of small investors, the Union Cabinet chaired by Prime Minister Narendra Modi has just given its approval to introduce banning of Unregulated Deposit Schemes Bill, 2018, in Parliament. This is another step towards making good Finance Minister Arun Jaitley's promise of a comprehensive central legislation to deal with the menace of illicit deposit-taking schemes made in his Budget Speech two years ago.
"Companies/institutions running such schemes exploit existing regulatory gaps and lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings," said the official statement said. And the worst victims of these Ponzi schemes are the poor and the financially illiterate. The comprehensive bill hopes to change this state of affairs through complete prohibition of unregulated deposit-taking activity - making them an offence ex-ante rather than the existing legislative-cum-regulatory framework, which only comes into effect ex-post with considerable time lags - and imposing heavy pecuniary fines and deterrent punishment.
Separately, the Cabinet has also given its approval to introduce the Chit Funds (Amendment) Bill in Parliament, which is aimed at facilitating orderly growth of the segment and enabling "greater financial access of people to other financial products".
The Banning of Unregulated Deposit Schemes Bill is likely to be tabled when the Parliament meets again next month for the remaining 23 sittings. It proposes to create three different types of offences - running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement in relation to unregulated deposit schemes - and set up competent authorities to "ensure repayment of deposits in the event of default by a deposit taking establishment. Significantly, clear-cut timelines have been provided for attachment of property and restitution to depositors. "Being a comprehensive Union law, the Bill adopts best practices from State laws, while entrusting the primary responsibility of implementing the provisions of the legislation to the state governments," added the release.
The Bill might even spell serious repercussions for bitcoins and other cryptocurrencies. Last December, the government cautioned investors to be wary of virtual currencies like bitcoin, saying they are like Ponzi schemes with no legal tender and protection. "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. Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes," said the Finance Ministry's statement. Then, in his latest Budget speech, Jaitley declared that "the government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system".
That the world of cryptocurrencies is susceptible to Ponzi schemes is not news. A 2017 research paper by four academics at the University of Cagliari in Italy found "a remarkably high number of Ponzi schemes" on the Ethereum blockchain-191 schemes collecting $418761 from 2304 distinct users before its second birthday. At that time, its market cap was just $8 billion. Since the total capitalization of the digital currency has now mushroomed to $101.95 billion, it stands to logic that the impact of Ponzi schemes has also increased proportionally.
Worryingly, a recent India Today investigation tracked down numerous fraudulent ventures proliferating across the country's cryptocurrency landscape, all soliciting investments for a variety of illegitimate digital assets in exchange for unrealistic promises. Just a few months ago, actor Sohail Khan was seen promoting a virtual coin BFX, launched by a production house called Blue Fox Motion Pictures (Private) Limited. But the undercover investigation at Blue Fox's New Delhi office revealed its cryptocurrency could be nothing more than a virtual parking space for unaccounted wealth, or worse, a Ponzi scheme to dupe gullible investors. Vishal, a company agent for BFX digital coins, disclosed that the project aimed at raising finances for film-making, without any checks or balances.
Ruling out issuing any formal record of transactions, he offered phenomenal returns on investments between Rs 500 and Rs 800 within a year on a single BFX priced at less than Rs 25 at present. "There's nothing in writing in cryptocurrency. You give me money, I'll put the coins into your (digital) wallet," he claimed. The government comes to know of nothing. It won't appear in its dreams. It's an online, invisible wallet." After India Today exposed the BFX's real gameplan, actor Sohail Khan sought to distance himself from the cryptocurrency.
Then there is Digambar, a senior official at the UK-based Money Trade Coin, who was found to be soliciting investments without billing, at his Mumbai office. "You will be handing over the cash. Your account will be created right away. Give me the details. Don't worry about the KYC," he told the undercover reporters posing as investors. He went on to issue promises of imaginary returns of a 12-fold growth in six months but with a caveat that investments have to be locked up for the half-year period. To hear him, an investment in 100 coins floated by his company entailed a daily revenue of almost $1,000 or more than Rs 60,000 every single day. In addition, he also promised a Caribbean citizenship and cash in legal tender for offshore Indian investors.
There are more such players in the market with names like Prizm Coin, Deltin Coins, Etherecash, all part of the $3.5 billion worth of virtual currency transactions that the income tax department claims have been conducted in India over the past one-and-half years. Although nowhere does it mention the words cryptocurrency or virtual currency, Inc42 Media points out that the explanatory notes that say 'either in cash or in kind or in the form of a specified service' provided under 'unregulated deposit scheme' can accommodate Bitcoin transactions too.
With PTI inputs