Estonia Central Bank Warns Bitcoin Could Act as a Ponzi Scheme

The central bank of Estonia stated this week that it believes Bitcoin (BTC) could act more like a Ponzi scheme than a virtual currency or an electronic payment system. This has led the Estonian central bank to urge consumers to completely avoid the digital currency altogether because it does not provide any guarantees to the user.

Mihkel Nommela, head of the Estonian central bank’s payment and settlement systems department, told Bloomberg News on Thursday that bitcoin “is a problematic scheme” and that essentially “all risks are assumed by the user, who has no one to turn to for help.”

“All in all, virtual currency schemes are an innovation that deserves some caution, given the lack of any guarantees and responsible parties to back them in the longer term or evidence that this isn’t just a Ponzi scheme,” said Nommela.

Despite the cautionary warnings being issued by the central bank, the nation’s finance ministry has yet to establish regulations nor has it passed legislation to counter any risks that bitcoin, according to the central bank, might pose.

bitcoinThe Bank of Lithuania echoed Estonia’s sentiments regarding bitcoin. Vilius Sapoka, Director of the Financial Services and Markets Supervision Department at the Bank of Lithuania, told the news outlet, “Virtual currencies, such as Bitcoin, are unsupervised and unregulated, Those buying or using such currencies take all the risks and responsibility for possible losses.”

Estonia as well as Latvia and Lithuania suffered the worst recessions in 2007 and 2008 in all of Europe at the height of financial collapse. The economic crisis led the governments and central banks to increase regulatory powers to ensure its financial system is protected and that certain products cannot hurt its fragile finance sector.

This isn’t the first time that someone has made the case that bitcoin could very well be a Ponzi scheme. Gary North, an economist from the Austrian School, published a controversial article last month explaining that “bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff. (It will never rival Social Security, however.)”

North used the economics of Ponzi schemes and the Austrian Theory’s origins of money to make his conclusion.

Others like Robert Wenzel, publisher of Economic Policy Journal, say the rise of the cryptocurrency is nothing but a pump and dump scheme.

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