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7 things to know before using Bitcoin

Thursday - 5/1/2014, 4:58am  ET

Bitcoin logo (AP)
Local leaders want consumers to know about the risks of using virtual currencies, including Bitcoin (AP)

WASHINGTON -- With the growing popularity and interest in virtual currencies, including Bitcoin comes the risk of using a nascent and volatile system that operates largely on its own.

As more businesses and organizations choose to accept Bitcoin for goods and services, Maryland Attorney General Doug Gansler and Commissioner of Financial Regulation Mark Kaufman want consumers to know about the risks of virtual currencies.

1. How virtual currencies work

The currency is an electronic medium of exchange that can be bought or sold through virtual currency exchanges and used to purchase goods or services where accepted. The currencies are stored in an electronic wallet -- or e- Wallet -- which is a digital system that allows payments online with a computer or mobile device.

2. No regulation

"These virtual currencies exist with absolutely no regulation or safety net," says Gansler. "They're not insured" by the Federal Deposit Insurance Corporation, or FDIC, which insures regular bank deposits up to $250,000.

3. No recourse

Virtual currency is susceptible to cyber-attacks, and there be may be no recourse should virtual currency disappear from a consumer's e-Wallet.

"It's not backed by any governmental entity, so you could lose your money if you set up one of these e-Wallets with Bitcoin in it," says Gansler.

4. Investments are risky

Virtual currencies are highly volatile, with the potential for complete loss of value, says Kaufman. Virtual currency volatility may make securities offerings tied to these currencies unsuitable for most investors.

5. Which companies are involved?

Investors in virtual currencies will be highly reliant on unregulated companies, which may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions.

Gansler says that whenever possible, limit virtual currency transactions to known companies -- "Companies that you have a trust in, that you would deal with in brick and mortar."

6. Laws don't keep up with new technologies

"Technology moves faster than the law, but not much faster than the hackers and the Internet criminals," says Gansler. As is often the case, the introduction of new technology often spurs discussions of legislation and appropriate usage, as in the case of Google Glass.

7. Gansler wouldn't risk Bitcoin

Gansler says one of the largest Bitcoin exchanges, MtGox, shut down after claiming to be the victim of hackers and losing more than $350 million of virtual currency.

Gansler concludes, "I certainly, personally, would use a credit card or real money."

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