In case they missed the recent dire headlines, Connecticut’s top bank regulator is adding his own stern warning to consumers swayed by what they see as the potential of of dabbling in the unregulated world of virtual currencies.
State Banking Commissioner Howard Pitkin warns about the potential for risk and abuse from virtual currency, including digital and crypto-currency, which are gaining in both popularity and controversy. Growing numbers of merchants, businesses and other organizations currently accept Bitcoin, one example of crypto-currency, in lieu of traditional currency, Pitkin said.
“The value of virtual currencies is highly volatile; the concept behind the currency is difficult to understand even for sophisticated financial experts,’’ he says in a statement. “Individuals should be aware that using or investing in virtual currency presents very real risks, including a total loss of value. Unlike traditional currency, these alternatives typically are not backed by tangible assets, are not issued by a governmental authority and are subject to little or no regulation.”
For those who insist on plowing ahead, Pitkin offers this advice:
1. Volatility. One of the major risks of holding virtual currencies is their volatility. Their value can rise or fall substantially over a short period of time. Bitcoin, the most well-known virtual currency in the market, traded for $13 in January 2013, $100 last July, more than $1,100 last December, and is now valued at $427 as of this month. Bitcoins, and others like it, are basically lines of computer code that are valued by the marketplace with no governmental support or oversight. Anyone holding virtual currencies should understand that they could lose their investment as the market changes.
2. No deposit guarantee. Virtual currency accounts are not insured by the Federal Deposit Insurance Corp. (FDIC), which insures bank deposits up to $250,000. Once the funds are gone, there is no way to retrieve them and no way to make the consumer whole.
3. Lack of protection for digital wallets. Some exchange companies that offer to store the consumer’s virtual currencies in virtual wallets have been unable to protect them. There are already a number of well publicized instances where consumers have lost all their funds in digital wallets.
4. Connection to criminal activity. Because virtual currencies provide some anonymity, criminal elements appear to have used them for money laundering and other crimes. When exchanges are shut down as a result of either knowingly or unknowingly facilitating a crime, customers may have difficulty accessing their funds.
5. Tax implications. The IRS issued guidance on March 25 regarding virtual currency. Individuals should consult their tax advisor or contact the IRS directly for questions regarding the tax implications of virtual currency.
