Why it is in news?

• The spurt in the prices of Bitcoin and other cryptocurrencies seems to have rung an alarm bell, with the Finance Ministry expressing concern and likening them to Ponzi schemes.
• The ministry has cautioned against investing in them.
• Noting the “phenomenal increase” in the price of virtual currencies (VCs), including Bitcoin, in India and globally, it said, “VCs don’t have any intrinsic value and are not backed by any kind of assets. The price of bitcoin and other VCs is entirely a matter of speculation resulting in spurt and volatility in their prices.

Concerns:

• Virtual currency (VC) transactions are encrypted and are likely being used for terror-funding, smuggling, drug trafficking and money laundering.
• Besides, VCs are not reliable as they are stored in digital/electronic format, making them vulnerable to hacking and malware attack. 

Background:

• The government of India is yet to introduce regulations covering the digital currency market, but it already created an interdisciplinary committee to research and to develop a regulatory framework for the sector.
• The committee’s members included the country’s central bank, the Reserve Bank of India (RBI)
• Meanwhile, the Indian Supreme Court has issued an appeal to the government in November to start the drafting of a regulatory framework to ‘control the flow of Bitcoin’ in the country.
• Despite its latest warning, the finance ministry has not implemented a total ban on virtual currency trading and has not announced any measures that will curb the adoption and trading of digital currencies in India.

What are Ponzi Schemes?

• A Ponzi can be any scheme in which the returns to promised to older investors are paid from the money collected from new investors, and not actual profits from the investments.
• Ponzi schemes were named after Charles Ponzi, a clerk in Boston who, almost a century ago, duped thousands of investors into speculating on phenomenal returns from the humble postage stamp.
• Those running a Ponzi scheme reel in their first set of investors by introducing them to a great opportunity. They may even pay up the fanciful returns out of their personal funds. But once investors begin to bite, they build a house of cards, using money from the stream of new entrants, to pay the older patrons.
• Even if profits are made from the investments, more often than not, the scheme operators siphon it off to private accounts. As long as new investors are willing to sign up, the Ponzi scheme /works. But when the flow of fresh money dwindles, the house of cards collapses.

THE HINDU