Is Bitcoin a Ponzi scheme or not?

Asia’s largest bank – DBS – hops on the bandwagon and associates Bitcoin as a Ponzi scheme. Is it truly a Ponzi scheme or are there underlying reasons?

By Joelyn Chan

Cryptocurrencies are digital forms of money that use cryptography to secure and verify transactions. The most prominent cryptocurrency, Bitcoin, has been gaining worldwide attention. Since its inception in 2008, its value has been rising. In 2017, the global value of cryptocurrencies stands around US$183 billion. To put this valuation into perspective: the global diamond market’s value is around US$250 billion. This small difference between the worth of an intangible cryptocurrency and a real diamond amazes and scares people at the same time.

Recently, DBS’ Group chief information officer and head of group technology and operations, David Gledhill, said, “We see Bitcoin as a bit of a Ponzi scheme.”

Source: Coindesk

DBS’ perplexing stance

Announcing the bank’s stance, Gledhill noted that Bitcoin transactions are “incredibly expensive” and “all the fees are hidden through crypto-mechanisms”. While this hidden cost is a cause for concern, investors may not be surprised. Some banks have hidden charges, and there are still calls for increased transparency in the long-standing financial institutions. Thus, consumers may find it ironic when a bank calls out the lack of clarity in cryptocurrencies’ cost structure.

Suppose that Bitcoin is a Ponzi scheme, it is understandable for banks to rule it out entirely. Gledhill also said, “it’s a watch and learn” situation with Bitcoin and “the bank prefers to focus on its electronic transactions of government-back currencies”. For now, the stance of DBS and other banking institutions are not cast in stone and may change in the future. If Wall Street powerhouse Goldman Sachs decides to trade Bitcoin, the other banking players may follow suit. This is just one of the many possible turn of events.

The “Ponzi scheme” label hints of a ploy by big players

DBS is not the first bank to make a statement on Bitcoin. JPMorgan Chase CEO Jamie Dimon called Bitcoin a “fraud” while UBS branded Bitcoin a “speculative bubble“. Yet, not all comments condemn Bitcoin fully. Christine Lagarde, the head of the International Monetary Fund, felt that “Bitcoin is too expensive for me at the moment” while tech billionaire Bill Gates believed “Bitcoin is better than currency”. China Renaissance CEO Fan Bao said that Bitcoin was “getting a little bit bubblish.” With such mixed opinions, there is no certainty on how this dominant cryptocurrency will fare in the future.

Cryptocurrencies are 2017’s best-performing investments, achieving better results than market indexes. They enable peer-to-peer cash system and have the ability to render banking institutions redundant. Thus, the move to label Bitcoin as a Ponzi scheme seems like a consolidated effort by legacy banks to weaken Bitcoin’s rise.

Peer-to-peer lending has the makings of a Ponzi scheme. But, the noise and suspicion relating to it pale in comparison with Bitcoin’s current predicament. Ezubao is a Ponzi scheme that promised returns of up to 10 times the amount collected. It collected 50 billion yuan (US$7.6 billion) in less than two years from more than 900,000 investors. Nonetheless, DBS still partners peer-to-peer lending platforms, such as MoolahSense, to refer smaller business to other lenders.

The regulators’ take on Ponzi schemes

According to the U.S. Securities and Exchange Commission (SEC), a Ponzi scheme is “an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors.” The keywords are “scam” and “returns”. However, some investors of Bitcoin claim that promised returns were not part of the picture.

Back in December 2015, SEC officials charged two Bitcoin mining companies with conducting a Ponzi scheme. Lately, it has also made moves to regulate Bitcoin and cryptocurrencies as an asset class. Compared to the US, Asia appears to have progressed faster in the formation of a regulatory stance. For instance, Singapore’s Monetary Authority of Singapore (MAS) is conducting its second consultation on its Payment Services Bill. MAS intends to use the bill to bring virtual currency services like Bitcoin into regulatory purview.  As the world scrutinises Bitcoin, regulators’ decisions and policies would set the direction ahead.

Take caution if the deal is too good to be true

At the end of the day, the onus is on investors to be cautious. Before investing in Bitcoin or any other cryptocurrencies, investors should do their due diligence. Some questions suggested by The Straits Times: Do you understand what business the ICO issuer is doing?  What sort of rights are you entitled to as the holder of a coin?

Instead of labeling Bitcoin as a “Ponzi scheme”, DBS should objectively warn its customers against the potential risk of Bitcoin. Like any other financial instruments, investments come with risk. Similarly, there is undoubtedly a danger of scammers packaging a Ponzi scheme as Bitcoin. But, to each his own. A knife can be a cutting tool or a weapon to kill. Consumers have to decide for themselves and invest their money wisely.

About the Author

Joelyn Chan
Joelyn is a freelance writer based in Singapore. She graduated from Nanyang Technological University with a Double Bachelor in Accountancy and Business. During her free time, she explores the latest developments in fintech and business.