Cryptocurrencies are ‘Ponzi schemes,’ Indian finance ministry warns investors

India’s finance ministry has cautioned investors about the risks of trading in cryptocurrencies such as bitcoin, branding the ‘virtual currencies’ as akin to a Ponzi scheme.

The warning comes a day after South Korea, a global hub for bitcoin trading, said it would ban anonymous cryptocurrency trading due to the “abnormal situation of speculation.”

READ MORE: Bitcoin tumbles as South Korea threatens to throw cold water on its red-hot crypto market

In a statement India’s Ministry of Finance noted there had been a “phenomenal” increase in demand for digital currencies such as bitcoin.

“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,” it warned.

A Ponzi scheme is an investment fraud that involves payment of purported returns to existing investors from funds contributed by new investors.

Cryptocurrencies are not legal tender in India and have no regulatory permissions, the ministry stated, adding, that investors were trading  “entirely at their own  risk” and were advised to avoid such activity.

“Virtual Currencies are not backed by Government fiat. These are also not legal tender. Hence, VCs are not currencies.”

The price of these cryptocurrencies are “entirely a matter of mere speculation resulting in spurt and volatility in their prices,” the government agency advised.

The statement also cautioned that the encrypted nature of these transactions pave the way for illegal activities such as “terror-funding, smuggling, drug trafficking and other money-laundering acts.”

However, unlike neighbouring countries Bangladesh and Nepal where bitcoin is illegal, India stopped short of issuing an outright ban on digital currencies.

The Minister of State for Finance, Pon Radhakrishanan, confirmed Friday that an interdisciplinary committee has been set up to examine the existing global regulatory and legal structures governing Bitcoin, reported The Economic Times.

The Reserve Bank of India previously urged those trading in virtual currencies that they were doing so at their own risk and clarified that they had not given authorisation for any company to deal in such cryptocurrencies.

Earlier this month, Reuters reported that India’s central tax authority was investigating bitcoin exchanges to try and find a way to tax transactions.

While bitcoin is losing its dominance, rival cryptocurrency Ripple has surged to an all time high. It has had the biggest growth in value among digital currencies this year – recording a whopping 30,000 percent rise.

READ MORE: Ripple's 30,000% surge briefly overtakes ethereum as second most valuable cryptocurrency