August 12, 2014 in Business

Bitcoin a big risk, feds warn

Digital currencies subject to hacking, scams
Lindsay Wise McClatchy-Tribune
 

WASHINGTON – Government regulators issued a consumer advisory Monday on the risks of bitcoin and other digital currencies, warning that the virtual funds expose users to volatile exchange rates, hacking, scams and theft.

Markups and transaction fees for digital funds such as bitcoin, XRP and Dogecoin can cost consumers more than using credit cards or regular cash, and the companies that issue digital currencies aren’t backed or insured by any government, according to the alert from the Consumer Financial Protection Bureau, a federal watchdog agency.

The advisory also cautions consumers that digital currencies can experience huge price fluctuations due to speculation and the lack of regulation. Bitcoin’s price has fallen by as much as 80 percent in a single day.

Consumers who use or invest in virtual currencies “are stepping into the Wild West,” the bureau’s director, Richard Cordray, said in a statement.

“Virtual currencies may have potential benefits, but consumers need to be cautious and they need to be asking the right questions,” Cordray said.

In addition to issuing the advisory, the bureau announced Monday that it will start collecting consumers’ complaints about virtual currencies on its website, consumerfinance.gov.

An official with the trade group Bitcoin Foundation shrugged off the advisory as standard practice.

“There are consumer risks around new technologies, and even-keeled educational material from government agencies can help make consumers aware and savvy,” Jim Harper, Bitcoin Foundation’s global policy counsel, said in a statement.

In response to Cordray’s characterization of the digital currency market as “the Wild West,” Harper said new ideas – from credit cards to the Internet – always started as unknowns that became familiar over time as the market matured.

“Bitcoin is poised to modernize legacy financial services, one of the most regulated industries in the global economy. It’s not going to remain an unknown territory for very long,” he said.

Virtual currencies are a form of electronic money that enables people to send and receive payments online. Consumers store the funds in digital wallets in clouds or on computers and protect them with 64-digit codes known as keys.

Advocates hail the technology as an innovative, anti-establishment payment system that protects users’ anonymity and has the potential to transcend politics and national boundaries.

But the pitfalls of bitcoin and other virtual currencies became painfully clear to many users in February, when the Japanese bitcoin exchange Mt. Gox suddenly disappeared. The exchange had lost $460 million to hackers, and collapsed into bankruptcy. Customers have yet to recover any money.

“Some virtual currency exchanges do not identify their owners, their phone numbers and addresses, or even the countries where they are located,” Monday’s advisory warned. “Ask yourself: In any other business transaction, would you trust these people with your money?”


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