Consumer Financial Protection Bureau issues warning on Bitcoin
08/11/2014 4:12 PM
08/11/2014 4:19 PM
The Consumer Financial Protection Bureau on Monday issued its first consumer advisory on virtual currencies, including Bitcoin, and said it would begin accepting complaints about such issues or companies.
The agency warns consumers to be aware of hackers and schemes, volatile exchange rates and a lack of government protection.
“Virtual currencies may have potential benefits but consumers need to be cautious and they need to be asking the right questions,” Richard Cordray, the director of the bureau, said in a statement. “Virtual currencies are not backed by any government or central bank, and at this point, consumers are stepping into the Wild West when they engage in the market.”
In the bulletin, the agency urges virtual currency users to pay attention to potential hidden costs associated with digital money. For one, the price of Bitcoin can fluctuate wildly. In about five years, the value of Bitcoin has gone from just a few dollars to over $1,000. It is now trading around $580, according to the virtual currency website CoinDesk.
“This is positive for consumers,” said Mercedes Tunstall, a partner in the Washington office of the law firm Ballard Spahr, who has testified before Congress on digital money. “For virtual currencies, the average consumer doesn’t really know how to protect themselves, and they really cannot protect themselves.”
Experts say a lack of government regulation has contributed to this price instability, preventing digital currency from becoming more mainstream. But some Bitcoin supporters say increased regulation could thwart innovation and threaten the freedom the currency was intended to promote.
The agency also warns against the false assumption that Bitcoin transactions are anonymous and urges consumers to be vigilant when transferring digital money and using virtual currency exchanges.
“Information about each and every Bitcoin transaction is publicly shared and stored forever,” the CFPB’s bulletin states. “It is possible that others will be able to estimate both how much Bitcoin you own and where you are.”
When it was first introduced in 2009 by a programmer, or group of programmers, Bitcoin largely appealed to anti-establishment enthusiasts and technology buffs who operated on the fringes of the traditional financial system. But as digital money, particularly Bitcoin, has become more popular, it has also caught the attention of government agencies, who are now grappling with how to regulate virtual currency.
In March, the Internal Revenue Service announced that it would treat Bitcoin like property rather than currency for tax purposes. The Securities and Exchange Commission and the Financial Industry Regulatory Authority have said the currency is risky but have not enacted regulations.
Another issue has also been just how to enforce one country’s policies across nations. One of the most spectacular failures in the currency was the shutting down of Mt. Gox, a Bitcoin trading platform that was based in Japan.
Last month, New York became the first state to introduce proposed regulations for virtual currency companies. The “BitLicense” plan, announced by Benjamin Lawsky, New York state’s top financial regulator, includes rules on consumer protection, the prevention of money laundering and cybersecurity. The new rules are now out for public comment.
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