Personal Finance

CFPB Warns of Bitcoin Dangers

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It’s a bit too early to trust Bitcoin, the Consumer Financial Protection Bureau said Monday, in an announcement sure to be unpopular with fans of the digital currency.

Bitcoin users face “unclear costs, volatile exchange rates, the threat of hacking and scams,” and lack of clear refund paths, the CFPB said in a pretty sternly-issued warning.

“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,” said CFPB director Richard Cordray. The announcement was meant as a warning about other virtual currencies, too, such as XRP or Dogecoin.

“Because virtual currency accounts are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, if a virtual currency company fails – and many have – the government will not cover the loss,” the CFPB said in its statement.

The announcement comes after the CFPB was urged in May to get more involved in regulating virtual currencies. A report issued by Congress’ Government Accountability Office then found that government banking regulators had so far focused only on law enforcement actions related to virtual currencies, and “not focused on emerging consumer protection issues.”

In its announcement, the CFPB said it would be accepting consumer complaints about virtual currencies. It also offered more details on why virtual currencies can cause consumer headaches:

  • Exchange rates are volatile and costs unclear: The exchange rate of Bitcoins to U.S. dollars in 2013 fell as much as 61% in a single day. In 2014, the value of Bitcoins has dropped by as much as 80% in a single day. The advisory explains that consumers who buy virtual currencies should be prepared to weather this kind of volatility. Consumers should also consider whether there are mark-ups or other fees when using an exchange or digital wallet provider. Companies may be charging consumers to buy, spend or accept virtual currencies.
  • Hackers and scammers pose serious security threats: Virtual currencies are targets for highly sophisticated hackers and scammers. Individuals, digital wallet providers, and exchanges are all at risk. For example, if a hacker gains access to a consumer’s Bitcoin “private keys,” which are 64-character codes that unlock the consumer’s funds, the consumer can lose all their virtual currency. Fraudsters are also taking advantage of the hype surrounding virtual currencies to pose as Bitcoin exchanges, Bitcoin intermediaries and Bitcoin traders in an effort to lure consumers to send money, which is then stolen.
  • Companies may not offer help or refunds for lost or stolen funds: Some virtual currency companies do not identify their owners, provide phone numbers and addresses, or even specify the country in which they are located. Before using a company’s products or services, consumers should carefully consider if they know how to contact the company in question, and if they know their contractual rights. If a consumer trusts a company to hold their virtual currencies and something goes wrong, the company may not offer the kind of help the consumer would expect from a bank, debit card or credit card provider. In fact, some virtual currency companies disclaim responsibility for consumer losses if funds are lost or stolen.

Not all the voices of consumer protection are critical of virtual currencies, however. Former CFPB deputy director Raj Date is now a supporter, and sits on the board of a bitcoin startup.

“The thing I like about innovation in consumer finance, like bitcoin, like digital currency, is exactly the same reason I went to the CFPB. How is it that you can take new ideas and make the system work better for people?” Date said in April, according to CoinDesk.com.

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