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.

An official statement issued on Friday 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.”

“Consumers need to be extremely cautious so as to avoid getting trapped in such Ponzi schemes,” the statement added.

Bitcoin prices fell 2 per cent during the trading day, but Ripple, another cryptocurrency, gainedaround 20 per cent during the day.

The government said VC transactions are encrypted and are likely being used for terror-funding, smuggling, drug trafficking and money laundering.

Vulnerable to hacking The Ministry said VCs are not reliable as they are stored in digital/electronic format, making them vulnerable to hacking and malware attack.

Meanwhile, the Finance Ministry’s position regarding taxation of gains on cryptocurrency trade is still unclear. Earlier this month, the Income Tax Department conducted surveys on nine VC exchanges in Bengaluru, Hyderabad, Mumbai, Delhi and Kochi to ascertain the source of funds.

According to chartered accountants, the government must first specify the head under which such gains must be declared. “It hasn’t been defined as money laundering or any other economic offence; nor is it a legitimate security like equity or bonds. Players can’t pay tax without some clarity,” a CA said.

The government, however, sounded a note of caution, stating that “VCs are not backed by government fiat” and are not legal tender. VCs are neither currencies nor coins, and the government or the RBI has not authorised them as a medium of exchange, it noted.

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