While we were away …
The ministry of finance is the latest to join in issuing a warning on Bitcoin trading and other virtual currencies which are not backed by a government fiat. It also said that the price of Bitcoin is a matter of speculation and likened the trading of virtual currencies to Ponzi schemes.
“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,” the ministry added.
Meanwhile, the RBI has cautioned users thrice already. The latest warning came on February 1. It said that any user, holder, investor, or trader dealing with cryptocurrencies would be doing so at their own risk.
The government added that it and the Reserve Bank of India (RBI) hasn’t authorized virtual currencies as a medium of exchange nor has any regulator in India has given a licence to any exchanges. It again cautioned persons dealing with virtual currencies to consider these facts and beware the risks in dealing with them. Currently, the price of Bitcoin in India stands at around Rs 8,40,465.52 ($13,191) and the price has been volatile during the entire month. On Christmas Eve, the price of Bitcoin stood at $14,500.
However, companies engaged with Bitcoins in India took a more defensive tone to the ministry’s warning.
“I see this more as a cautionary note from government, advising people to be careful with respect to investing in virtual currencies (VC), given the hype created around bitcoins due to the astronomical rise in its value, over the past few months. This is definitely not a policy statement and is just a reinforcement of the communication that has come from RBI, in the past also,” said Vishal Gupta, co-founder of Digital Assets & Blockchain Foundation of India (DABFI), an industry body which seeks to promote the usage and virtual currencies.
Income tax department scrutiny
Last month, the income tax department conducted surveys across nine bitcoin exchanges across the country. The I-T department reportedly sought information about transactions, parties involved and bank accounts. The publications added that this was done as an effort to profile and scrutinize assessees for tax evasion.
Business Today reports that there are 20 lakh entities registered on these exchanges and that about 4 to 5 lakh were operational and transacting.
1. Why is this happening: What has probably led to this pronouncement is the fact that the value of Bitcoin grew rapidly in a very short span of time, and that has gotten many people interested in investing in it. This points towards potentially more speculators investing in crypto-currencies from India. The volatility of the price virtual currencies point to “pump-and-dump.”
Thus, the Ministry of Finance is right to issue a warning to Bitcoin investors, to try and contain or prevent a potential frenzy, which could lead to a loss for those who don’t really understand what they’re getting into. Remember that Bitcoin does not have an underlying asset and the price is right now largely speculative. The number of Bitcoins in regulated to 21 million and is creating an artificial scarcity. Early investors are now looking for an exit and the price of Bitcoin looks very attractive to potential investors but the price will collapse when there is a large sell-off on exchanges.
2. Who regulates bitcoin? Is it commodity or currency? The RBI and SEBI have been trying to shift the onus on each other for regulating bitcoins and other cryptocurrencies as there is confusion whether they would be regulated as a “currency” or a “commodity”.
Note that the idea of Bitcoins as a currency is losing ground as it becomes unviable to authenticate a transaction in a reasonable period of time. Earlier, Bitcoin transactions used to take about 10 minutes to authenticate a transaction and now takes about one hour to authenticate a transaction as the number of nodes on a blockchain increases.
Remember that the Valve Corporation, which operates online games marketplace Steam, says it is ending support for bitcoin as a payment method for game purchases.
Valve said that transaction fees that are charged to the customer by the bitcoin network went up $20 compared to $0.2 when they enabled bitcoin. “When checking out on Steam, a customer will transfer x amount of Bitcoin for the cost of the game, plus y amount of Bitcoin to cover the transaction fee charged by the Bitcoin network …The value of Bitcoin is only guaranteed for a certain period of time so if the transaction doesn’t complete within that window of time, then the amount of Bitcoin needed to cover the transaction can change. The amount it can change has been increasing recently to a point where it can be significantly different,” Valve said.
Perhaps SEBI will have better luck in regulating Bitcoins as an asset.
3. Why isn’t there a ban? The government is caught in a bind here: there are Indians who are already invested in bitcoin and thus there are third party rights in play. There is some groundwork already created with multiple notifications from the RBI warning against investing in bitcoins, so a ban would not be surprising, or without sufficient groundwork, but the impact it would have on any move towards crypto-currencies in India would be seen as negative, and a ban would be seen as regressive. Startups who are already facilitating purchases of bitcoins from India would be negatively impacting, and there could be an impact on risk-taking when it comes to future technologies. Lastly, this government is very guarded about perception that India is a tech-friendly country, which would be seriously dented by any kind of a ban. Not an easy situation for the government to be in.
That said, likening virtual currencies to a Ponzi scheme is a very strong statement, and perhaps an indication of what is to come.
Full statement from the Ministry of Finance
Government Cautions People Against Risks in Investing in Virtual ‘Currencies’; Says VCs are like Ponzi Schemes
The Ministry of Finance has issued the following statement today on Virtual ‘Currencies’.
“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. 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. 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. 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.
VCs 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, Virtual ‘Currencies’ (VCs) are neither currencies nor coins. The Government or Reserve Bank of India has not authorised any VCs as a medium of exchange. Further, the Government or any other regulator in India has not given license to any agency for working as exchange or any other kind of intermediary for any VC. Persons dealing in them must consider these facts and beware of the risks involved in dealing in VCs.
The users, holders and traders of VCs have already been cautioned three times, in December, 2013, February, 2017 and December, 2017, by Reserve Bank of India about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to by investing in Bitcoin and/ or other VCs. 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.”