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  1. Bitcoin surge, ICOs raise regulatory hackles on e-ponzi scam fears

Bitcoin surge, ICOs raise regulatory hackles on e-ponzi scam fears

A gravity-defying bitcoin rally to over Rs 10 lakh a piece, interspersed with 'stories' of people making crores from thousands, has left the regulators flummoxed amid fears that a complete lack of regulatory regime for such cryptocurrencies may give rise to 'e-ponzi' scams.

By: | New Delhi | Published: December 10, 2017 1:20 PM
ponzi cases, chit fund cases, money not restored to investors, Minister of State for Corporate Affairs, Arjun Ram Meghwal, Arjun Ram Meghwal lok shabha, lok sabha, Serious Fraud Investigation Office Of late, several other variants have come to the fore including in the name of real estate, agriculture produce, holiday schemes and even dairy farms. (Reuters)

A gravity-defying bitcoin rally to over Rs 10 lakh a piece, interspersed with ‘stories’ of people making crores from thousands, has left the regulators flummoxed amid fears that a complete lack of regulatory regime for such cryptocurrencies may give rise to ‘e-ponzi’ scams. The financial sector watchdogs, including RBI and Sebi, as also various government agencies, will soon get into a huddle to prepare a framework to safeguard the gullible investors and to clamp down on the fraudsters who may try to manipulate the regulatory gaps, a senior official said. There are quite a few proposals on the table and those include applying to cryptocurrencies the existing regulations aimed at checking spread of ponzi schemes or illicit money- pooling activities, money laundering and black money generation and circulation, another official added. The fear is that sudden spurt of numerous schemes offering investment in virtual currencies is reminiscent of the plantation scams of 1990s in India and the eponymous ‘ponzi’ scheme of 1920s in the US, the official said. The jury is still out on whether such virtual currencies should be allowed as legal payment tender or investments, though there are also suggestions from some quarters for allowing them with necessary checks and balances. The officials said the issue needs to be discussed at the highest level and one such forum where this matter has been discussed in the past and would be taken forward is the FSDC (Financial Stability and Development Council), whose members include top government functionaries and regulatory heads. A wider public awareness campaign may also be unveiled to make people aware of huge risks associated with investments in completely-unregulated areas like bitcoins and other such virtual currencies, the officials said. The Reserve Bank has already issued multiple warnings about such risks, while reiterating that it has not given any licence or authorisation to any entity or company to operate such schemes or deal with bitcoin or any virtual currency. The RBI has been issuing such warnings since 2013, the first time when the surge in bitcoins caught the attention of Indians, but the risks have multiplied manifold now in the wake of a significant spurt in the valuation of many such VCs and a rapid growth in Initial Coin Offerings (ICOs).

Modelled on the Initial Public Offers or IPOs for issuance of new shares in the stock market, some entities have begun resorting to ICOs to raise funds from investors, including HNIs and other individuals, who are getting lured into claims of huge returns from bitcoins and other such variants — apparently getting minted in the digital world but also reaching the real world including as wedding gifts. This trend has led to some suggesting that the Securities and Exchange Board of India (Sebi), which regulates capital markets, should regulate this hitherto unregulated area, but others suggest that the virtual currencies should ideally be under the RBI jurisdiction as they are payment instruments. The recent spurt in bitcoin value — from under USD 10,000 at start of year to close to USD 20,000 on Thursday before a sharp 20 per cent plunge within hours — has largely been attributed to plans by some derivative exchanges in the US to launch trading in bitcoin-linked derivatives. The officials ruled out any such move in India for the foreseeable future, even as bitcoin has reportedly overtaken rupee as the world’s fifth largest currency with the total circulation of nearly USD 300 billion. The officials said all regulatory gaps must be filled fast as the bitcoin phenomenon is fast catching the fancy of general public and complaints have begun to pour in at various levels about alleged fraudulent activities in their names.

In addition to financial risks — the value of bitcoins have seen huge falls within hours — the regulators are worried about their use for illicit and illegal activities, subjecting the users to an unintentional breach of anti-money laundering and combating the financing of terrorism laws. Concerns also emanate from some unscrupulous entities indulging in illicit money-pooling activities — commonly known as ponzi schemes — with the promise of huge returns from investment in bitcoins and other variants, which they claim are minted through blockchain, a distributed ledger technology that was created to mint bitcoins and comprises of extremely complex algorithms with several thousand nodes for each chain. There is a suspicion that some so-called cryptocurrencies and bitcoin investments may actually have nothing to do with any blockchain-developed virtual currency and are just new ways devised by scamsters to ride the wave and what they may be offering could be ‘e-ponzi’ schemes, the officials said. In India, the term ‘ponzi’ is often used for illicit collective investment schemes, rules for which were introduced after a big spurt in illegal money-pooling schemes in 1990s in the name of plantation companies that promised huge returns from tea and other plantations.

Of late, several other variants have come to the fore including in the name of real estate, agriculture produce, holiday schemes and even dairy farms. The regulators now fear that virtual currencies could be the latest in this list. A typical ‘ponzi’ scheme involves the operator collecting a large amount of money from investors and paying them returns from their own money or the money collected from subsequent investors, rather than from profit earned by the person or the entity operating such a scheme. Such activities came to be known as ‘ponzi’ schemes after Charles Ponzi, who became notorious in the US in 1920s for deploying this technique while promising 50 per cent return on investments in 45 days and 100 per cent within 90 days.

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