Brazilian central bank governor Ilan Goldfjan has called cryptocurrencies a ponzi scheme. He however said there was a need to distinguish the currencies from the underlying blockchain technology.

The bitcoin is a financial asset with no ballast that people buy because they believe it will appreciate. That is a typical bubble or pyramid.

Goldfjan joins several influential figures in the financial space who have knocked the digital currencies. Jamie Dimon JP Morgan CEO has repeatedly called bitcoin a fraud and had threatened to sack any staff dealing in the currency, calling it stupid. Hedge fund manager, Ray Dalio has equally expressed scepticism about the long term viability of cryptocurrencies.

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Why Goldfjan may have such opinions.

A ponzi scheme is one that promises investors fantastic returns without any form of risk. Ponzi schemes rely on a constant flow of new investors, in order to pay existing investors. When this stop, the scheme crashes. Goldfan’s sentiments could be understood in light of the astronomical returns bitcoin and some other cyrptocurrencies have made year to date. A significant proportion of investors are purchasing them in expectation of even higher price appreciation. Utility for the coins has been slow in coming. Initial Coin Offerings (ICOs) have raised billions of dollars this year, with many of them being unproven concepts.

Operators of various Ponzi schmes in Nigeria have also begun processing their payments using bitcoin, fuelling concern by regulators that cryptocurrencies could be used for illegal activities.

Implications of his comments

Brazil is currently legislating on the use of cryptocurrencies, and the governor’s comments could lead to a strict regulatory regime. Emerging markets across the world have taken varying approaches to cryptocurrencies. While Russia and India have embraced them, China has banned its citizens from transacting in them while it draws up regulations.

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