Brazilian central bank President Ilan Goldfajn has compared the leading cryptocurrency Bitcoin to a pyramid scheme. He thus joins the ranks of numerous financial luminaries who apparently don’t understand Bitcoin, from billionaire investors to megabank CEOs like Jamie Dimon.
Based on a report by RttNews, Goldfajn has claimed that Bitcoin is similar to a pyramid scheme. He argued that people who are investing in digital currencies are interested in the same kind of returns being chased by investors in pyramid fraud.
"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 [scheme]."
What is a pyramid scheme?
Under a pyramid scam, the organizers try to attract investors to invest in a product. The organizers then encourage investors to find new buyers or investors in the product. However, the returns promised to earlier investors will come from investments made by new investors rather than the sales from the underlying product. Eventually such a scheme collapses upon itself, bankrupting the later investors while heavily rewarding early ones.
Central bank’s position
According to Goldfajn, the central bank has no interest whatsoever in ”bubbles or illegal payments,” and the bank is not encouraging financial activities involving digital currencies. In 2014, the central bank already issued a notice about the possible risks of investing in virtual currencies. It also published a research note about the possible use cases of Blockchain, the underlying technology behind cryptocurrencies.
Meanwhile, Brazilian lawmakers are creating rules and regulations covering virtual currency activities in the country. It remains to be seen, however, if the comments made by Goldfajn will have an impact on the legislative process.