With bitcoins in the news, the state Department of Financial Institutions has offered its view.
Choosing understatement over bombast, a DFI alert issued Tuesday advised that “it would be wise for consumers to consider the risks of holding virtual currencies for investment or as a currency.”
For those of you unfamiliar with bitcoins, you should know that they are not money in the traditional sense. Instead, they and others like them are basically lines of computer code that are valued by the marketplace with no governmental support or oversight.
Before buying, investing in or trading the product, the statement from DFI said, consumers should consider five primary factors.
• Volatility. The value of a virtual currency can rise or fall substantially over a short period of time. Bitcoin, the most well-known virtual currency in the market, traded for $13 in January 2013, $100 last July, over $1,100 in December, and, Tuesday afternoon, the value was listed online at $625.95. A few minutes later, the price had fallen to $622..
• No Deposit Guarantee. There are no deposit guarantees like FDIC insurance to protect customer funds held by virtual currency exchanges. Once the funds are gone, there is no way to retrieve them and no way to make the consumer whole.
• Lack of Protection for digital wallets. Some exchange companies that offer to store the consumer’s virtual currencies in virtual wallets have been unable to protect them. There are a number of instances where consumers have lost all their funds because their wallets have been hacked.
• Connection to criminal activity. Because virtual currencies provide some anonymity, criminal elements have found them useful for money laundering and other crimes. When exchanges are shut down as a result of either knowingly or unknowingly facilitating a crime, customers may have difficulty accessing their funds.
• Tax implications. The Internal Revenue Service has not opined on the tax implications of virtual currencies. The benefits of using virtual currencies may be outweighed when the IRS determines the tax repercussion.