Ponzi Scheme


    In Context

    • Recently, the Reserve Bank of India (RBI) deputy governor has said that cryptocurrencies are akin to Ponzi schemes (due to volatility, regulator challenges, and other factors) or even worse, and banning them is the most sensible option for India. 

    What Are Ponzi Schemes? 

    • It is a fraudulent investing scam promising high rates of return with little risk to investors.
    • The term “Ponzi Scheme” was coined in 1919 after the name of an Italian con-man named Charles Ponzi.
      • He arrived in the US in 1882 and made money through fraudulent schemes.
    • It works like a pyramid scheme and generates returns for older investors by acquiring new investors, who are promised a large profit at little to no risk.
    • It relies on a constant flow of new investments to continue to provide returns to older investors and when the flow of fresh investments runs out, the scheme falls apart.
    • These are generally multi-level marketing schemes, however, Multi-level marketing itself is not illegal in India because there is a product being sold. But direct marketing companies cannot promote pyramid or money circulation schemes.

    Safeguards against Ponzi Schemes in India:

    • Ponzi schemes are banned under the Prize Chit and Money Circulation (Banning) Act, 1978.
      • It is a Central Act but the respective State governments are the enforcement agency of this law
    • These are also dealt with by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002.
    • The Banning of unregulated Deposit Schemes Act 2019 has been enacted to prevent fraudulent schemes.
      • It provides for severe punishment ranging from 1 year to 10 years and fines ranging from 2 lakh to 50 crore rupees to act as a deterrent.
      •  It has adequate provisions for disgorgement or repayment of deposits in cases where deposits have been raised illegally. 
      • It mentions that the first claim on the recovered money will be that of depositors.

    Source: ET