The Bitcoins Are Coming, the Bitcoins Are Coming

The United States Consumer Financial Protection Bureau (CFPB) has issued an advisory warning consumers about the risks of Bitcoin and other virtual currencies.

The bureau “is working to identify and understand potential consumer protection concerns raised by these emerging technologies to determine what action, if any, may be necessary to protect consumers,” spokesperson Moira Vahey told CRM Buyer.

“We will continue to carefully monitor the development of digital currencies as they relate to the consumer financial marketplace and, if necessary, take appropriate steps,” she added.

CFPB’s Laundry List of Virtual Currency Issues

Virtual currencies aren’t issued by governments or banks, and no one is required to accept them, CFPB has warned.

Further, they are not kept in banks or credit unions but in a digital wallet accessible by the owner of those currencies.

If something goes wrong with a purchase of virtual currencies, it’s difficult to contact the seller, the bureau said. In some cases, virtual currency exchanges do not identify their owners or list their phone numbers, street addresses or the country where they are located.

A virtual currency may be more expensive than first thought, CFPB warned, pointing out that Bitcoin’s price fell by 61 percent in one day last year and about 80 percent in one day this year.

Consumers should research exchange rates for virtual currencies and look into any markups imposed and how long the transactions will take, among other things. Media reports list exchange rates at US$50 over rates you could get elsewhere, the bureau said.

Bitcoin ATMs are not really ATMs, it warned, and they may charge high transaction fees, reportedly up to 7 percent.

Also, Bitcoin transactions may not be entirely anonymous, as information about every transaction is publicly shared and stored forever and can be tracked.

Reefer Madness Redux?

CFPB’s warnings appear somewhat shrill, and its citing of examples is suspect.

It mentioned unnamed online reports about one person named “Nicole,” whose name was changed for citing, having been cheated when trying to buy Bitcoins online.

CFPB’s Vahey did not respond when asked whether it could not have dug up a better example, whether it had only managed to dig up one victim so far, and whether the online stories had been double-checked for accuracy.

As for devaluation and other issues with virtual currencies, monetary currencies issued by governments and banks have also been devalued over the years — the most notable example of late being Greece. Further, governments do default on their debts, the latest being Argentina.

“Bitcoin is not without its detractors or its unknowns, but we have watched the digital currency for some time, and we notice, for every dip and pitfall, the currency bounces back and continues to be a feasible way to pay for goods and services,” said Soren Mills, chief marketing officer at Newegg, which accepts payments in the virtual currency.

“It may not be perfect, but it works, and our customers like it,” he told CRM Buyer.

Bitcoin’s Rapid Acceptance

Bitcoin has been on a tear of late.

Dell reportedly has taken a $50,000 hardware order paid in Bitcoins; online payment processor Payza has introduced a Bitcoin buying option in 190 countries; and gold and silver dealer Euro Pacific Precious Metal in May began accepting Bitcoin payments.

So, was the CFPB scare-mongering? Does it have a larger agenda, given the distaste governments in general have for virtual currencies?

The bureau is merely listing the worst-case scenarios in an attempt to keep consumers informed, according to Jerry Brito, a senior research fellow at George Mason University’s Mercatus Center. Brito is an expert on virtual currencies who has testified on the subject before Congress.

“If this advisory is the only thing you ever read about Bitcoin, you’re going to think it’s pretty scary,” he told CRM Buyer. “Luckily, it isn’t the only thing you’ll probably read about Bitcoin.”