The U.S. Customer Financial Protection Bureau has released a consumer advisory that warns consumers of the risks of virtual currencies such as bitcoins.
The bureau listed hackers, fewer protections, cost and scams as the primary risks that are associated with virtual currencies. Other virtual currencies that the advisory mentioned aside from bitcoins include XRP and dogecoin.
The bureau describes virtual currencies as a type of electric money that is purchased using real money. However, these virtual currencies are not issued or supported by the United States, or by any government and bank, for that matter. Merchants and sellers are not required to treat virtual currencies as valid forms of payment, although a number of them do accept the virtual currency, including Apple's App Store, Dell, Overstock.com, Tigerdirect.com, Etsy, Reddit, Zynga, PayPal, eBay and OkCupid. Google earlier this year also added a bitcoin currency converter. Virtual currencies are generated, maintained and stored digitally, with users keeping their virtual money in digital wallets that are accessed by private keys.
"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 Richard Cordray, director of the financial protection bureau, referring to the always-present risk of massive swings in the exchange rates of virtual currencies.
The advisory noted that the price of bitcoin, the most popular virtual currency, has dropped by as much as 80 percent this year, which would undoubtedly translate to a massive loss for bitcoin users. The currency converter on Google lists one bitcoin as valued at $569.84 on Aug. 11; it was valued at $625 in mid-July and when it started in 2008 it was valued around $1,100.
In addition to the potential for losses, virtual currencies have been targeted by hackers since their inception, with virtual currency companies providing little to no help to users in case virtual currency funds have been stolen or compromised.
Virtual currencies have fallen under new regulatory investigations due to the failure of Tokyo-based exchange Mt. Gox, which went bankrupt after losses of about $650 million due to the massive swings in the value of bitcoins.
The advisory goes into more detail on the risks that bitcoins pose to consumers. Hackers, first and foremost, have been capable of breaching even the most advanced security systems. If a hacker is able to get hold of a user's private keys, then the entire virtual currency wallet of the user can be stolen in an instant.
Because virtual currencies are not recognized by any government or bank as an official currency, users receive few, if any, protections, compared with the protection that a consumer can receive from a bank or a federal institution.
Using virtual currencies isn't simply converting your cash into a digital form. Using virtual currencies can actually cost consumers more, compared with using cash or credit cards to make purchases, the bureau says.
Scams have also become rampant in the world of virtual currencies, as criminals are taking advantage of the popularity of virtual currencies to fool people into letting go of their hard-earned money.
The U.S. Customer Financial Protection Bureau is stepping up its efforts to oversee virtual currencies such as bitcoins, as so ordered by the Government Accountability Office.
