Bitcoin Ponzi Scheme

• Context (IE): The Enforcement Directorate (ED) has arrested a Delhi resident concerning a Bitcoin-based Ponzi scheme.
• In this case, bitcoins were invested instead of money. This case also questioned crypto exchanges as they converted bitcoins to Indian currency without any accounting trail.

Ponzi schemes

• Ponzi schemes are fraudulent investment schemes promising high rates of return without much risk to investors.
• Fraudulent schemes run by Charles Ponzi in the US in 1882 led to the popular term ” Ponzi Scheme”.
• It works like a multi-level pyramid scheme.
• A Ponzi scheme pays existing investors with funds collected from new investors.
• As the flow of fresh investments runs out, the scheme falls apart.
• However, multi-level marketing itself is not illegal in India if a product is being sold.
• However, direct marketing companies cannot promote pyramid or money circulation schemes.

Provisions related to Ponzi Schemes in India

• Non-clear jurisdiction of regulatory bodies on Ponzi schemes led to their popularity.
• Prize Chit and Money Circulation (Banning) Act, 1978, bans Ponzi schemes in India.
• It empowers state governments to enforce the law.
• The Enforcement Directorate under the Prevention of Money Laundering Act, 2002 also investigates similar cases.
• The Banning of Unregulated Deposit Schemes Act 2019 has been enacted to prevent fraudulent schemes.