SEC warns investors about pitfalls of Bitcoin

Checkered history, lack of regulation among reasons to be wary of virtual currency, agency says

May 8, 2014 @ 10:54 am

By Mark Schoeff Jr.

Virtual currency may be trendy but it also poses dangers to investors, the Securities and Exchange Commission warned in an alert to investors.

The most popular form of digital money is known as Bitcoin, a peer-to-peer currency that has been used to purchase goods and services and has been exchanged for traditional currencies, such as the dollar. Bitcoin, which is not backed by any government, trades on exchanges based outside the United States.

The currency has caught on, in part, because of low costs and ease of use. But the SEC said that it also attracts a criminal element.

“The rise of Bitcoin and other virtual and digital currencies creates new concerns for investors,” the SEC said in the alert. “A new product, technology or innovation — such as Bitcoin — has the potential to give rise both to frauds and high-risk investment opportunities. Potential investors can be easily enticed with the promise of high returns in a new investment space and also may be less skeptical when assessing something novel, new and cutting-edge.”

(See also: Bitcoin: The future of money)

The SEC emphasized that investments involving Bitcoin are not insured and that Bitcoins are not legal tender. In addition, the currency's value is volatile and it trades on exchanges that could be vulnerable to technical problems or cyberthreats. In February, the Mt. Gox Bitcoin exchange in Japan shut down after its operators said hackers attacked it and stole $450 million worth of the currency.

But the currency is likely to stay popular — and even has at least one defender on Capitol Hill. On Thursday, the Federal Election Commission approved Bitcoin campaign contributions. By the middle of the afternoon, Rep. Jared Polis, D-Colo., was asking supporters to donate to his campaign in Bitcoins.

“I am honored to serve in Congress and be in a position to do my best to prevent efforts to ban or restrict digital currencies,” Mr. Polis wrote in a fundraising email. “I believe Bitcoin, and other digital currencies, are just beginning to show the world what a tremendous tool they can be; whether it is reducing transaction costs in developing nations or giving people more options for engaging in commerce. Digital currencies have the potential to break down the barriers that traditional banking institutions have put in place.”

Regulators and law enforcement officials are more cautious. They have had difficulty in cracking down on Bitcoin fraud because its users, who span the globe, are anonymous and authorities cannot freeze encrypted Bitcoins, as they can a bank account, according to the SEC alert.

State regulators also are wary of Bitcoin. It was the topic of a panel at a North American Securities Administrators Association Inc. conference in Washington in April.

“My concern is for investors,” Charles Vice, commissioner of the Kentucky Department of Financial Institutions, said at the NASAA event.

Mr. Vice said that there have been cases of people paying for homes and saving for college with Bitcoin.

The SEC alert noted that Texas recently imposed a cease-and-desist order on an oil and gas exploration company that accepted Bitcoins to purchase interests in wells but failed to disclose the risks involved.

Last July, the SEC filed charges against an individual for an alleged Ponzi scheme involving Bitcoin.

Regulators are grappling with how to monitor Bitcoin and protect investors. The Conference of State Bank Supervisors, which Mr. Vice chairs, has established an emerging payments task force.

“We're trying to move as fast as we can as carefully as we can to make sure we're doing the right things,” Mr. Vice said in an interview on the sidelines of the NASAA conference.

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