The virtual currency market is like the “Wild West,” according to Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB). Last week, the bureau issued a consumer advisory warning of the risks associated with Bitcoin and other virtual currencies. The agency also started accepting virtual currency complaints; a move it hinted could inform future policy action.
Virtual currencies such as Bitcoin, XRP and Dogecoin provide a way for consumers to track, store and send payments over the Internet, and the bureau noted that these currencies may have the potential to make payment processing cheaper or faster. However, they are not backed by any government or central bank.
“If a virtual currency company fails — and many have — the government will not cover the loss,” the CFPB said in a press release.
The CFPB’s Aug. 11 advisory warns that virtual currencies carry significant risk to consumers. For instance, the bureau noted that exchange rates were extremely volatile. The exchange rate of Bitcoins to U.S. dollars in 2013 fell by as much as 61 percent in one single day. This year, the value of Bitcoins has dropped by as much as 80 percent in a single day. The advisory explains that consumers who buy virtual currencies should be prepared to weather this kind of volatility.
The six-page advisory also urged consumers to be mindful of the potential risks posed by “digital wallet providers,” which are companies that allow consumers to create accounts to store and manage their virtual currencies. Consumers should consider whether there are mark-ups or other fees when using an exchange or digital wallet provider. Companies may be charging consumers to buy, spend or accept virtual currencies, the bureau said.
Security is another concern.
“Virtual currencies are targets for highly sophisticated hackers, who have been able to breach advanced security systems,” the bureau warned, adding that “fraudsters are taking advantage of the hype surrounding virtual currencies.”
The bureau said using virtual currencies could open the door to phone and computer hackers. Bank accounts linked to a digital wallet may also be at risk. Companies may not offer help or refunds for lost or stolen funds, the CFPB said
The CFPB also announced that consumers who encounter a problem with virtual currency products and services — including exchange services or online digital wallets — now can submit a complaint with the CFPB.
As with other complaints the bureau receives regarding consumer financial products and services, virtual currency-related complaints will be sent to the appropriate company, and the CFPB will work to get a response. If the complaint is about an issue outside the CFPB’s jurisdiction, the agency will forward the complaint to the appropriate federal or state regulator, the CFPB said.
The bureau also hinted that it may consider further action in the virtual currency market.
“Importantly, the CFPB will use all complaints to better understand the virtual currency market and its effect on consumers,” the agency said in a press release. “The CFPB will also use the complaints to help enforce federal consumer financial laws and, if appropriate, take consumer protection policy steps.”
The CFPB’s announcements come just weeks after the agency revealed in a Government Accountability Office (GAO) report that it planned to become more deeply involved in the federal response to virtual currencies.
“Emerging consumer risks indicate that interagency collaborative efforts may need to place greater emphasis on consumer protection issues in order to address the full range of challenges posed by virtual currencies,” the GAO said in its June 26 report.
Responding to a draft of the report, William Wade-Gery, the CFPB’s acting assistant director for card and payments markets, said the bureau’s own work on virtual currencies and the work of other financial regulators could benefit from a collaborative approach.
“We look forward to increasing our involvement in formal working groups as they engage on specific issues related to consumer protection,” Wade-Gery said.
View the CFPB’s advisory
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CFPB to become more involved in government’s response to virtual currencies