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Lindeen: Buyer Beware on Bitcoin

Montanans should know what they are buying with virtual currency

May 8, 2014

HELENA – Montana Securities Commissioner Monica J. Lindeen issued an investor advisory today, cautioning Montanans to consider the risks associated with virtual currencies, like Bitcoin.

Virtual currency, which includes digital and crypto-currency 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.

"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," said Lindeen, who regulates Montana's investment industry. "The value of virtual currencies is highly volatile and the concept behind the currency is difficult to understand even for sophisticated financial experts. Investors should be aware that investments that incorporate virtual currency present very real risks."

Virtual currency is an electronic medium of exchange that can be bought or sold through virtual currency exchanges and used to purchase goods or services where accepted. These currencies are stored in an electronic wallet, also known as an e-Wallet, which is a digital system that allows payments online via a computer or mobile device such as a smartphone.

Recently, one of the largest Bitcoin exchanges, MtGox, shut down after claiming to be the victim of hackers and losing more than $350 million of virtual currency. Despite the controversy, virtual currency may find its way into your e-Wallet.

According to Lindeen's alert, Montanans should consider the following before investing in any offering containing virtual currency:

  • Virtual currency is subject to minimal regulation, susceptible to cyber-attacks and there may be no recourse should the virtual currency disappear.
  • Virtual currency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000.
  • Investments tied to virtual currency may be unsuitable for most investors due to their volatility.
  • Investors in virtual currency will be highly reliant upon unregulated companies that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions.
  • Investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect their e-Wallets from theft.

For more information about the risks associated with virtual currency, contact Lindeen's office at 1-800-332-6148.