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 the 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 $1,012.4 on January 2. “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.
Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi on December 20 said the virtual currency so far has not posed any systemic risk, but added 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 which 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 hardearned 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 ministry said.
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