Bitcoin, the cryptocurrency that has become the craze all over the world, is a hit with a lot of Indians too. More than $3.5 billion worth of transactions in the cryptocurrency have been conducted in India over a 17-month period, according to the income tax department. Bitcoin has the allure of any Ponzi scheme with a get-rich-quick promise. Additionally, it can be a new opportunity for hoarders of black money.

The profiles of common investors in Bitcoin prove this. They are tech-savvy young investors, real estate players and jewellers, tax officials told Reuters.

But the government won't let Bitcoin trap the honest investors or help the black-money industry. While governments across world are not sure what to do with Bitcoin, the Indian government has swiftly acted to rein in Bitcoin and other such currencies. The income tax department has sent tax notices to tens of thousands of people dealing in cryptocurrency. The notices were sent after a survey assessed the penetration and patterns of virtual currency trade. The tax department is not going to wait until a final decision is taken on the legality of cryptocurrencies.

Last month, the Income Tax (IT) department planned to send notices to 4 to 5 lakh high networth individuals (HNI) across the country who were trading on the exchanges of this unregulated virtual currency, the PTI reported. The move came after the IT department conducted survey operations at major bitcoin exchanges across the country on suspicion of alleged tax evasion. These operations were undertaken for gathering evidence for establishing the identity of investors and traders, the transaction undertaken by them, identity of counter-parties and related bank accounts.

Top lenders including State Bank of India, Axis Bank, HDFC Bank, ICICI Bank and Yes Bank have suspended some accounts of major Bitcoin exchanges in India, suspecting dubious transactions, an ET report said citing sources. The banks have also sought additional collateral from the promoters of these exchanges on their borrowings and have capped cash withdrawals from the few accounts that are still operational. The accounts of a few exchanges were frozen after banks discovered they were used for reasons other than those stated when they were opened. At least eight accounts in various banks have been suspended, while others are being scrutinised and have had cash withdrawal limits imposed. Even the operational accounts could be suspended in the coming weeks.


In addition to financial risks—the value of bitcoins has seen huge fluctuation—the regulators are worried about their use for illicit and illegal activities, subjecting the users to an unintentional breach of laws against money laundering and terror finance. Concerns also emanate from some unscrupulous entities indulging in illicit money-pooling activities—commonly known as ponzi schemes—with the promise of huge returns from investment in bitcoins and other variants, which they claim are minted through blockchain, a distributed ledger technology that was created to mint bitcoins and comprises of extremely complex algorithms with several thousand nodes for each chain.

There is a suspicion that some so-called cryptocurrencies and bitcoin investments may actually have nothing to do with any blockchain-developed virtual currency and are just new ways devised by scamsters to ride the wave and what they may be offering could be 'e-ponzi' schemes. The financial regulators are worried that a complete lack of regulatory regime for such cryptocurrencies may give rise to 'e-ponzi' schemes.

The financial sector watchdogs, including RBI and Sebi, as also various government agencies, will get into a huddle to prepare a framework to safeguard the gullible investors and to clamp down on the fraudsters who may try to manipulate the regulatory gaps, according to a PTI report. There are quite a few proposals on the table. These include applying to cryptocurrencies the existing regulations aimed at checking the spread of ponzi schemes or illicit money-pooling activities, money laundering and black money generation and circulation.