The deputy governor of the Reserve Bank of India, Shri T Rabi Sankar, has not only joined the various eminent financial figures who liken cryptocurrency to Ponzi schemes – he has gone one step further and said that Ponzi schemes set up by charlatans are actually superior “from a social perspective” to bitcoin, ether and the rest.

In a keynote speech delivered on Monday to the Indian Banks Association Annual Banking Technology Conference and Awards, Mr Sankar offered a stinging critique of cryptocurrencies in general.

“Even Ponzi schemes invest in income earning assets,” said Sankar, suggesting that this makes Ponzi schemes superior to cryptocurrency, before carrying on to add:

“A bitcoin is akin to a zero-coupon perpetual; it’s like you paid money to buy a bond which pays no interest and which will never pay back the principal. A bond with similar cash flows would be valued at zero, which, in fact, can be argued as the fundamental value of a cryptocurrency. If everything eventually returns to its equilibrium value, then the prognosis for investors in cryptocurrencies is not a happy one.”

Sankar went on to point out the various negative implications of cryptocurrencies becoming commonly used instead of government fiat money. He pointed out that existing measures such as Know Your Customer (KYC) and Anti Money Laundering (AML), complied with by the banking industry in the struggle against organised crime, would become impossible. He added that the primary tools used by governments to deal with economic problems – control of interest rates and money supply – would cease to have any effect.

In taking these positions, Sankar joins a distinguished list of financiers and thinkers. Nassim Nicholas Taleb, former derivatives trader, hedge fund advisor and famous author of Black Swan, an early enthusiast for cryptocurrency, has now turned against it. Like Sankar, Taleb likens cryptocurrency to a Ponzi scheme – “one that’s right out in the open”. Legendary investor Warren Buffett has described bitcoin in particular as “disgusting and contrary to the interests of civilisation”.

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Jamie Dimon, CEO of mighty US bank JP Morgan, has described bitcoin as “worthless” and “a fraud”. Forced into letting his bank offer cryptocurrency investment options by customer demand, Dimon said “our clients are adults, and they disagree … I don’t think you should smoke, either”.

Interestingly, there have been conventional Ponzi schemes conducted entirely using cryptocurrency, in which investors would give scammers bitcoin or ether and were paid returns in cryptocurrencies from the deposits of later investors. Chainalysis investigators estimated that the PlusToken scheme made more than $2bn-worth of cryptocurrencies for the scammers who ran it: from Sankar’s perspective, this was a Ponzi scheme taking place among the victims of another, bigger Ponzi scheme.

“There is no denying that cryptocurrency is going mainstream and that it’s not going away anytime soon,” Nicklas Nilsson, senior analyst at GlobalData, has told Verdict. “Yet it’s important to remember that cryptocurrency is a nascent phenomenon and numerous unresolved issues remain before it will ever become close to reshaping the main shortcomings of today’s financial systems.”

“Cryptocurrencies just don’t work”

previous report by GlobalData Thematic Research goes into the matter in detail.

The “fundamental problem is that cryptocurrencies do not work,” the report’s authors write. They add that:

  • Cryptocurrencies slow down transactions instead of speeding them up.
  • Cryptocurrencies add middlemen instead of removing them.
  • Cryptocurrencies add cost to transactions instead of removing it.
  • There is no rational basis for the valuations of most cryptocurrencies.

“The current valuations of the different currencies are not based on their utility, nor are they any indicator of their future utility; they are based purely on speculation,” the analysts say.

None of this is true of cryptocurrencies’ underlying technology, blockchains, which can be deployed to reduce all those listed problems: but the currencies themselves add nothing and have no value or backing of their own.

Ponzi scheme or not, cryptocurrencies for the moment are far from dead, though they are extremely volatile. As Sankar noted, in 2017 the total market capitalisation of all cryptocurrencies was just $20 billion. In just four years up to November 2021, almost $3 trillion poured into coins, multiplying their value over a hundredfold. In the three months since that peak, almost a trillion of that has poured right back out.