BITCOIN-based pyramid schemes are flourishing in India’s regulatory vacuum, according to industry insiders.
The Digital Assets and Blockchain Foundation of India (DABFI), a self-regulatory organization set up by and for Bitcoin and blockchain companies, told Livemint these schemes rely on code which gives members a cut when someone in their network buys Bitcoin and brings in new members.
Just like other multi-level marketing schemes, bringing in new members is easy for those at the top, but quickly becomes unsustainable as the network grows exponentially.
When the scheme inevitably collapses, the anonymous nature of Bitcoin makes it difficult to find out who was responsible.
— Aram Zucker-Scharff (@Chronotope) January 9, 2017
“People form companies that promise lucrative returns and indeed give them for the first few months. This is in exchange for bringing in more members under them who will buy Bitcoins and bring in newer members. This goes on till it explodes and the people lose all their money,” Bitcoin exchange Zebpay co-founder and chief executive officer Saurabh Agrawal told Livemint.
Bitcoin startups Zebpay, Unocoin, Coinsecure and Searchtrade launched DABFI last month to help build transparency in the market and credibility for crypto-currency businesses, according to the Times of India, as well to work with regulators.
So far, the Reserve Bank of India (RBI) has taken a hands-off approach, warning consumers in a press release in February that they are using virtual currencies at their own risk as it does not regulate such currencies.
According to Zebpay’s data, the value of Bitcoin has risen from around 57,000 rupees (US$866.57) last December to roughly 89,000 rupees (US$1,353) today.
“While the RBI may sleep soundly having issued its caveat emptor, given the attractive investment opportunity and ease of use and access virtual currencies offer, users are likely to throw caution to the wind and invest anyway,” Arnav Joshi senior associate at J. Sagar Associates writes in the Economic Times.