On August 11, 2014, the Consumer Financial Protection Bureau (CFPB) issued a consumer advisory warning consumers about the risks of virtual currencies, also referred to as “digital currencies,” such as Bitcoin.  The potential risks include the threat of hacking and scams, volatile exchange rates, unclear costs, and the risk that companies offering virtual currencies may not offer help or refunds for lost or stolen funds.  The CFPB also announced that consumers who encounter problems with a virtual currency may now submit a complaint with the CFPB.   

Designed as an alternative to current payment systems, digital currencies, such as Bitcoin, XRP, and Dogecoin, are a way for people to track, store, and send payments over the internet.  They are intended to make payment processing cheaper and faster.  However, virtual currencies are not backed by any government or central bank.  Therefore, because digital currencies are not backed by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, if a digital currency company fails—as many have—the government will not cover the loss.

Virtual currency companies have sprung up around the world in the last two years to offer products and services to consumers.  One type of company is the virtual currency exchange, which is a company that helps consumers buy or sell virtual currencies.  Another type of company is the “digital wallet provider,” which allows consumers to create accounts to store and manage their virtual currencies.

When dealing with a virtual currency company, consumers should carefully consider the following:

  • Beware of the Threat of Hackers and Scammers.  Virtual currencies are targets for sophisticated hackers and scammers.  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 of his virtual currency.  The CFPB warns that scammers have taken advantage of the hype surrounding virtual currencies to pose as Bitcoin exchanges or traders to lure consumers to send money, which is then stolen.
  • Beware of Exactly Who You are Dealing With.  The CFPB warns that some virtual currency companies do not identify their owners, provide phone numbers or addresses, or even specify the country in which they are located.  Therefore, before using a company’s products or services, consumers should carefully consider whether they will be able to contact the company in the event of a problem. 
  • Carefully Review Your Contractual Rights Because Companies May Not Offer Refunds for Lost or Stolen Funds.  Consumers should carefully review the contractual rights with the virtual currency company.  Some virtual currency companies contractually disclaim any responsibility for consumer losses if funds are stolen or lost, leaving the consumer without any recourse.
  • Beware of Volatile Exchange Rates and Costs.  The exchange rates 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 CFPB warns 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.  Companies may charge consumers to buy, spend, or accept virtual currencies.