The U.S. Consumer Financial Protection Bureau Monday chimed in on the craze over bitcoin and other virtual currencies, also known as “altcoins”, and had mostly negative things to tell U.S. consumers.
The CFPB issued an advisory for consumers to be aware of “potential issues with virtual currencies such as unclear costs, volatile exchange rates, the threat of hacking and scams, and that companies may not offer help or refunds for lost or stolen funds.” For the first time, the CFPB also said consumers can file complaints with the agency related to virtual currencies.
CFPB Director Richard Cordray had a colorful description in his prepared statement.
“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,” Cordray said.
Bitcoin’s price has held remarkably steady for months, following huge swings late last year and earlier this year. Alternative virtual currencies, such as litecoin and dogecoin, have also seen big dips and gains, sometimes following bitcoin’s lead.
Virtual currencies have the potential for innovations, the CFPB does say. But for now, there are more risks than benefits.
Here’s a rundown of the CFPB’s biggest concerns:
Exchange rates are volatile and costs unclear: The exchange rate of Bitcoins to U.S. dollars in 2013 fell as much as 61 percent in a single day. In 2014, the value of Bitcoins has dropped by as much as 80 percent 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.
Consumers who encounter a problem with virtual currency products and services – including exchange services or online digital wallets − can now submit a complaint with the CFPB.