Estonian Central Bank Warns Bitcoin May be a 'Ponzi Scheme'

A member of the Central Bank of Estonia has issued a warning to the country's citizens about bitcoin and other virtual currencies.

Mihkel Nõmmela, who heads the bank's Payment and Settlement Systems Department, called bitcoin a "problematic scheme" in an email to Bloomberg. Nõmmela echoed concerns raised at this week's bitcoin hearings in New York, noting that all risks in the system are assumed by the user, and that consumers have nowhere to turn for support. He said:

"Already there have been cases where the owner of a trading virtual money has suddenly ceased to exist, so customers have also suffered losses."

Nõmmela indicated Estonia's Central Bank would continue to pay attention to developments in the virtual currency space, saying there are "grounds to assume that the use of virtual money schemes will expand in Estonia as well". But, he did issue a firm warning to Estonians who seek to use it:

“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."

With the statements, Estonia appears to be following its eastern neighbor Russia in taking a more skeptical approach to virtual currency. On 27th January, the Bank of Russia issued warnings suggesting bitcoin users could be unintentionally breaking laws by unknowingly aiding money launderers and terrorists.

However, not every influential economist in Russia has come out against virtual currencies. The head of Sberbank, the biggest bank in Russia and Eastern Europe, had previously urged Russia not to restrict the growth of virtual currencies. Sberbank's head, German Gref, said:

“It’s a very interesting global experiment that breaks the paradigm of currency issuance."

Estonia was hit hard by the global recession, as its economy shrank by more than one-fifth from 2008 to 2009. The development lead to an economic downturn that was "exacerbated by global slowdown", according to the International Monetary Fund. The development all but wiped out the country's 7% growth from 2000 to 2007. As a result, bitcoin's sharp shifts in price have likely spooked regulators, who fear putting citizens at risk.

Nõmmela suggested that bitcoin users “can quickly lose it if, for example, his or her computer lacks the necessary anti-virus software or recovery options".

Notably, Estonia also only recently joined the Euro, becoming a member in 2011.

With a population of just over 1 million residents, the news is unlikely to spark market movements. But it could have ramifications in Estonia, which finds itself in the middle of the pack of countries when it comes to bitcoin interest, research suggests.

Estonia ranks 58th in terms of official downloads of the bitcoin client and wallet, behind Solvenia, but ahead of its southern neighbor Latvia, with 114 downloads. However, LocalBitcoins shows just a small number - less than 10 - Estonians are active users of its platform in the country.

Estonian flag image via Shutterstock.