Nation's Top Consumer Watchdog Warns of Bitcoin's Dangers
It’s just like mom always said, and it’s no different with Bitcoin: “If it seems too good to be true, it may be.”
So said the U.S. Consumer Financial Protection Bureau (CFPB) today, in a somewhat sternly-worded advisory warning to consumers about the potential pitfalls of doing business in Bitcoin. The alert also called out other cryptocurrencies, like Dogecoin and XRP, as potentially sketchy.
The message, which marked the federal consumer watchdog’s first official comment on Bitcoin, was clear: If you’re buying Bitcoin, you’re jumping without a net into the risky world of cryptocurrency.
“Virtual currencies are not backed by any government or central bank,” said CFPB director Richard Cordray, “and at this point consumers are stepping into the Wild West when they engage in the market.” He warned that, while virtual currency “may have potential benefits,” consumers should still educate themselves about digital currency and ask questions before they make the leap.
The four specific risks the CFPB advised consumers about in the six-page advisory alert are:
1. Hackers. These people are prone to prey on virtual currencies, the notice read. For instance, "highly sophisticated hackers" could unlock your virtual wallet, depleting all your funds.
2. Fewer protections. If you store your digital cash with someone else or a company, you’re on your own when “something goes wrong.”
3. Cost. While there definitely can be an upside to Bitcoin, the CFPB said that virtual currencies “can cost consumers much more to use than credit cards or even regular cash.” Their reasoning is based on volatility and hidden costs.
4. Scams. Fraudsters are out to cash in on the Bitcoin buzz, cheating “people with fake opportunities.” The CFPB cited exchanges and traders as potential areas for scams to occur.
The CFPB also said in the advisory that if you’ve ever been burned doing business with a Bitcoin (or other virtual currency) company, it wants to know. It’s now accepting Bitcoin business-related consumer complaints online here.
Bitcoin proponents, like Jim Harper, the global policy counsel for the Bitcoin Foundation, didn’t seem put off by the CFPB’s warning and call for complaints. Comparing the notice to “even-keeled educational material,” Harper told the Associated Press that he found it “helpful to the extent that it informs consumers without scaring them.”
Bitcoin backer Barry Silbert, SecondMarket Holdings and Bitcoin Investment Trust founder, wasn’t ruffled by the advisory, according to IDG News Service. He said in the report that “a number” of the risks listed in the CFPB notice could also apply to cash. “Investing in bitcoin is indeed risky, but using it is no more risky than using physical U.S. dollars.”
The Securities and Exchange Commission last year filed its first fraud lawsuit involving Bitcoin, claiming it was a Ponzi scheme. The agency later issued its own official warning about the cryptocurrency.
Related: 3 Big Misconceptions About Bitcoin
Kim Lachance Shandrow is the former West Coast editor at Entrepreneur.com. Previously, she was a commerce columnist at Los Angeles CityBeat, a news producer at MSNBC and KNBC in Los Angeles and a frequent contributor to the Los Angeles Times. She has also written for Government Technology magazine, LA Yoga magazine, the Lowell Sun newspaper, HealthCentral.com, PsychCentral.com and the former U.S. Surgeon General, Dr. C. Everett Coop. Follow her on Twitter at @Lashandrow. You can also follow her on Facebook here.