On May 7, 2014 the Securities and Exchange Commission’s Office of Investor Education and Advocacy issued an Investor Alert regarding potential concerns when considering an investment in Bitcoin. This Investor Alert underscores the need for investors to be prudent when investing in Bitcoin, but also serves as yet another confirmation of regulatory acceptance of the reality of Bitcoin’s growing market.
From obscure beginnings sometime prior to 2009, Bitcoin has grown in recognition and acceptance. This has led to some debate in the legal and regulatory communities regarding Bitcoin’s nature, much of which revolves around the basic question: Is Bitcoin “money”? Bitcoin is a mathematically based, digital currency with no intrinsic value. Rather, its value is dependent upon the trust of the Bitcoin community and the underlying reliability and complexity of its authentication process. Although Bitcoin is not issued or guaranteed by a central bank, one federal district court has held that Bitcoin “can be used as money” because it possesses attributes of a “currency or form of money.” On the other hand, the Internal Revenue Service has issued guidance that, for tax purposes, Bitcoin will be treated as property and not currency.
The SEC Investor Alert cautions investors that “[b]oth fraudsters and promoters of high-risk investment schemes may target Bitcoin users.” The alert cites as potential concerns the currency’s unpredictable exchange rate, limited recovery options in the event of fraud or theft, and ploys by “scam artists” to take advantage of investors’ limited knowledge of the true earnings potential of this relatively novel, alternative investment. It also identifies several “potential warning signs of investment fraud,” including guaranteed, high investment returns, creating a sense of urgency or pressure to buy “right now” or promising a Bitcoin investment that sounds too good to be true.
Although the Investor Alert directly addresses existing risks and warns investors to beware of potential scammers who might be attracted to Bitcoin and its investors, it is important to note that these risks apply to allinvestments, not just those involving Bitcoin. Just as significant, however, is what the Investor Alert does not say: It does not say that an investment in Bitcoin is illegal or inappropriate in all cases; it merely points out – correctly so – that investors should be cautious and know who they are dealing with. This is excellent, practical advice to consider when making any type of investment, not just those in Bitcoin.
There are many ways to invest in Bitcoin while avoiding the pitfalls described by the SEC in the Investor Alert. When considering an investment in Bitcoin, as with any investment, it is important to carefully review offering documents, know who you are dealing with, discuss the investment with trusted advisers, consider the availability of insurance, and have the investment opportunity reviewed by competent counsel who are knowledgeable and experienced in Bitcoin matters.