May 9 2014, 10:59am CDT | by Forbes
For the second time in months, the Securities and Exchange Commission issued a warning alerting investors about the hazards of Bitcoin and other virtual currencies. The move marks another effort by regulators to come to grips with a revolutionary technology that has been the darling of both Silicon Valley and the media. And it underscores the government’s concerns over the dangers virtual currencies pose to retail investors.
“A new product, technology, or innovation – such as Bitcoin – has the potential to give rise both to frauds and high-risk investment opportunities,” the SEC’s alert exclaimed on Wednesday.
The SEC is most concerned with the hype surrounding the new technology and the tendency for investors to switch off their skepticism when approached with an opportunity that is both little understood and promoted as the next get-rich-quick investment. Much of the language used by the commission – it warns investors to be weary of any investment that “sounds too good to be true,” for example – could apply to the latest can’t-miss financial product, a miraculous cure for a terminal disease, or any other exotic investment fad.
Bitcoin’s enigmatic characteristics make it all the more feasible for swindlers to dupe would-be investors. It is a digital, non-fiat currency that allows for some level of anonymity for users. Its value has fluctuated wildly and without many reliable institutions offering consumer-friendly access to the currency, it has remained obscure to mainstream users. Yet, though few people have begun to use the currency, its meteoric rise against the dollar – it went from nearly zero to a high eclipsing $1,100 in the span of a few months last year – along with the well-publicized endorsement it has received from Silicon Valley heavyweights such as Netscape founder Marc Andreessen have infused the technology with an aura of excitement last seen with the rise of Facebook and Twitter.
This combination makes it ripe for abuse, specially for investors desperate to capture the type of oversized returns enjoyed by early-movers in the Internet and social media.
It has also drawn concern from regulators. Last summer, the SEC brought an action against Bitcoin Savings and Trust for allegedly running a Ponzi scheme that defrauded dozens of investors of nearly $5 million. The Justice Department has also targeted individuals and companies that have used Bitcoin and other virtual currencies to conduct or mask criminal behavior.
They are not alone but the government’s response, unlike the SEC’s recent alert and the DOJ’s prosecutions, hasn’t always been negative. In March, 2013, FinCEN, the unit within the Treasury Department assigned to combat money laundering and other financial crimes, required virtual currency exchanges and other businesses to adhere to anti-money laundering laws. The move, which came as a surprise to many Bitcoin backers, granted the technology instant legitimacy by allowing the virtual currency to operate within the government’s legal framework rather than facing an outright ban. FinCEN’s guidance ushered in a wave of investments from established venture capital firms that had remained on the sidelines fearing that the virtual currency would not receive the government’s imprimatur.
More recently, the Internal Revenue Service issued guidance in March categorizing virtual currencies as property. And just yesterday, the Federal Election Commission weighed in, declaring that PACs may receive donations in bitcoins.
Led by New York Department of Financial Services Superintendent Benjamin Lawsky, state regulators have also been trying to determine how to apply preexisting laws to Bitcoin, which can serve as a currency, commodity, or transfer mechanism of various forms of property or information.
So far, the regulatory response to Bitcoin and other virtual currencies has been tepid as regulators try to balance a desire to promote the potentially revolutionary technology while still protecting consumers and investors from fraud. Several key regulators have also declined to chime in at this point: neither the Federal Reserve Bank nor the Commodity Futures Trading Commission have issued formal guidance. And, on the surface at least, the regulatory response has taken on a shape-shifting quality with each agency categorizing Bitcoin differently. In that sense, at least, the regulatory response mirrors Bitcoin, the technology that no one has been able to neatly classify.
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