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  • 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.

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  • 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.
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