Regulators including Reserve Bank of India (reserve Bank of India) and Securities and Exchange Board of India (Self) has expressed concerns before a parliamentary panel about how some individual investors are pooling money in small towns – with business models similar to chit funds – to invest in crypto assets.
RBI has pointed out how some Indians have started accepting cryptocurrency payments for export services, thus creating a wider systemic risk.
“It has been observed that some individuals are moving to smaller towns and raising money from people mainly in cash, with the promise of great returns in cryptocurrencies,” said a person familiar with the representations of the Union MPs. “It is exactly like a chit fund, but without any framework or rules.”
Regulators have reportedly flagged such cases in hinterland, particularly in Uttar Pradesh and Bihar, where collective investment schemes or chit funds have been issued for alleged investments in cryptocurrencies. Crypto exchanges and related associations have also been represented on the panel of central parliamentarians. Officials of SEBI and RBI could not be immediately reached for comment.
Apart from chit funds, schemes like MLM are also being promoted by some unregulated entities, warn insiders. “In India, a lot of scams are powered by smart contracts – anyone can launch their own coin and start raising funds,” said Siddhartha Sogni, founder of cryptocurrency research firm Crabaco.
scam schemes
“Every week there is a scam in India where fraudsters are trying to do a multi-level-marketing or collective investment scheme that promises people astronomical returns.”
Crabaco had red-flagged a “fake cryptocurrency exchange” that announced recruitment plans. Insiders said the exchange was simply collecting money and was a “scam”. In another example, a small company started collecting money from small investors in Uttar Pradesh with the promise of doubling its invested money in a year. The company claimed that it would invest the deposited money in cryptocurrencies. “There were many other instances where it was found that individuals are simply taking advantage of the cryptocurrency craze and regulators need to protect the rights of small investors,” said a person familiar with the developments.
reduce risk
RBI has said in the past that cryptocurrencies pose a systemic risk to India’s economy. Most exchanges have distanced themselves from individuals collecting money and investing in crypto assets, not unlike chit funds.
Another person privy to the development said Sebi had also raised concerns over the nomenclature used by the exchanges. The new rules may spell out what exchanges can and cannot say. “We have to draw a line on what we can and cannot say. Maybe, when you say ‘investment’, it may not be okay; it may not be okay to call it SIP, but right now As of now, we don’t know what terms to use,” said Satwik Viswanath, co-founder and CEO of cryptocurrency exchange Unocoin.
“These[terms]are used randomly by different companies to mean different things. Currently, exchanges have to explain certain concepts to a layman who has no idea what we are about. So, sometimes we have to come up with something to compare with,” he said.
Cryptocurrency exchanges and associations have also raised concerns about how some fly-by-night crypto exchanges have grown in the past few months, prompting the government to isolate genuine exchanges.
In addition, the government may also create some framework for how funds can be raised through an initial coin offering (ICO), which is the cryptocurrency equivalent of an IPO. “If these instruments are allowed then SEBI should regulate ICOs in India,” said Sogni of Crebaco.
regulation jitter
Investors are wary after New Delhi decided to introduce the Official Digital Currency Bill, 2021 on Cryptocurrency and Regulation in the Winter Session of Parliament. Both investors and venture capitalists appeared cautious after the Lok Sabha bulletin was published last week.