The United States Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy released an investor alert Wednesday, warning investors about potential risks involving Bitcoin and other digital currencies.
“A new product, technology, or innovation – such as Bitcoin – has the potential to give rise both to frauds and high-risk investment opportunities,” read the SEC’s statement. It continued by stating that potential investors could be lured to Bitcoin through promises of high returns in a unique emerging investing space, and could be less skeptical due to Bitcoin being a “cutting-edge” technology.
The SEC noted that Bitcoin users’ interest in the success of Bitcoin could also be taken advantage of by scam artists who may be or pretend to be Bitcoin users themselves, adding that scammers often focus their efforts on Bitcoin forums and related sites.
Because Bitcoin payment processors and exchanges may be unregulated or operating unlawfully, bitcoiners could have trouble recovering investments. And because of the anonymity involved with Bitcoin, law enforcement may face complications when investigating crimes, which could also impact SEC investigations involving Bitcoin, said the SEC.
“Law enforcement officials may have difficulty seizing or freezing illicit proceeds held in bitcoins. Bitcoin wallets are encrypted and unlike money held in a bank or brokerage account, bitcoins may not be held by a third-party custodian,” the warning read.
“As there is no central authority that collects Bitcoin user information, the SEC generally must rely on other sources, such as Bitcoin exchanges or users, for this type of information.”
The SEC previously released a Bitcoin investor alert regarding a potential Ponzi scheme involving the digital currency, and the Financial Industry Regulatory Authority previously released an investor alert detailing potential risks of buying and using digital currencies. Bitcoin was also included in the North American Securities Administrators Association’s list of the top 10 threats to investors for 2013. The SEC typically release a few investor alerts each year regarding new techniques used by scammers to con people out of their money.
One example of a Bitcoin scam artist charged by the SEC was that of SEC v. Shavers in July 2013, in which the defendant was charged with conducting a Bitcoin-related Ponzi scheme on an online Bitcoin forum. The scheme was advertised as a “Bitcoin ‘investment opportunity’ in an online Bitcoin forum, promising investors up to 7 percent interest per week and that the invested funds would be used for Bitcoin activities. Instead, the defendant allegedly used bitcoins from new investors to pay existing investors and to pay his personal expenses,” said the SEC.
The SEC advised investors to consider the following risks when evaluating Bitcoin investments:
- Not insured. While securities accounts at U.S. brokerage firms are often insured by the Securities Investor Protection Corporation (SIPC) and bank accounts at U.S. banks are often insured by the Federal Deposit Insurance Corporation (FDIC), bitcoins held in a digital wallet or Bitcoin exchange currently do not have similar protections.
- History of volatility. The exchange rate of Bitcoin historically has been very volatile and the exchange rate of Bitcoin could drastically decline. For example, the exchange rate of Bitcoin has dropped more than 50% in a single day. Bitcoin-related investments may be affected by such volatility.
- Government regulation. Bitcoins are not legal tender. Federal, state or foreign governments may restrict the use and exchange of Bitcoin.
- Security concerns. Bitcoin exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. Bitcoins also may be stolen by hackers.
- New and developing. As a recent invention, Bitcoin does not have an established track record of credibility and trust. Bitcoin and other virtual currencies are evolving.
The SEC also compiled the following list of potential warning signs of investment fraud:
- “Guaranteed” high investment returns. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.
- Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication – meaning you didn’t ask for it and don’t know the sender – about an investment opportunity.
- Unlicensed sellers. Federal and state securities laws require investment professionals and their firms who offer and sell investments to be licensed or registered. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. Check license and registration status by searching the SEC’s Investment Adviser Public Disclosure (IAPD) website or FINRA’s BrokerCheck website.
- No net worth or income requirements. The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Most registration exemptions require that investors are accredited investors. Be highly suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income.
- Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk.
- Pressure to buy RIGHT NOW. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.
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