Consumer Financial Protection Bureau: Bitcoin a ‘Wild West’ for Consumers

WASHINGTON – The U.S. consumer-finance regulator stepped up its role in overseeing virtual currencies, warning consumers of risks including wild fluctuations in value and hackers.


The Consumer Financial Protection Bureau (CFPB), making its first official statement on the issue, issued an advisory warning to consumers recently about virtual currencies.

“Virtual currencies may have potential benefits, but consumers need to be cautious and they need to be asking the right questions,” said CFPB Director Richard Cordray. “Virtual currencies are not backed by any government or central bank, and at this point consumers are stepping into the Wild West when they engage in the market.”

Bitcoin, introduced in 2008 by a programmer, or group of programmers, under the name Satoshi Nakamoto, is the leader in a burgeoning field of virtual currencies.

There are different ways to obtain bitcoin. Several marketplaces called “bitcoin exchanges” allow people to buy or sell bitcoin using different currencies. People can earn bitcoin in a process called “mining” in which complex mathematical problems are solved with resources available on a computer. Finally, users can trade bitcoin between them or use them to buy goods and services.

You hold onto bitcoins by setting up a virtual wallet, which exists either in the cloud or on a user’s computer. The coins themselves are just a string of numbers.

What makes bitcoin stand apart from other virtual currencies is that it is not managed by a central authority. Instead, an algorithm ensures the supply of bitcoin will not exceed 21 million. Roughly 12 million bitcoins have already been mined.


The currency’s framework works on the premise the resource is limited in number, which gives them value.

Initially, bitcoin appealed to technology buffs and anti-establishment enthusiasts, who wanted to operate outside of the traditional financial system. More recently, it has become increasingly popular, particularly among investment firms and entrepreneurs.

Supporters cite several characteristics of bitcoin as improvements over the current financial system. Bitcoins can be bought with near anonymity, which they say increases privacy and lowers fraud risk. Supporters also like the fact that these currencies are not backed by a government or central bank, and that their value fluctuates only according to demand.

Bitcoin uses a public ledger to verify transactions that are authenticated by encrypted signatures. The ledger also records every financial transaction.

Some businesses have started to accept bitcoin, including Dell, Overstock, and Expedia. States, political organizations, and even schools have approved its use.

There are more than 30 candidates, party organizations and political action committees (PAC) accepting bitcoin, according to data compiled by Make Your Laws, a PAC focused on campaign finance reform.

The same features that made bitcoin popular among its proponents, however, have brought it under scrutiny since its inception and have led to calls for more oversight and regulation on issues including U.S. tax treatment.


The currency has been widely adopted by users of Silk Road, a marketplace hidden in a part of the web called Tor. Users order goods – usually illicit drugs – and pay with bitcoin.

The U.S. government shut down Silk Road and seized about 30,000 bitcoins, valued at $13.6 million, in October 2013.

Bitcoin has been plagued by hacks and increasingly professional thefts since 2011. The number of substantial losses has grown in recent years, many of them involving more than $100,000.

Earlier this year, the collapse of one of the largest trading platforms for bitcoin increased awareness among regulators of the risk that virtual currencies pose to consumers.

Mt. Gox shut its doors in February after filing for bankruptcy following the loss of 850,000 bitcoin, worth almost $400 billion, in a series of hacking attacks. That month, Slovenia-based Bitstamp became the second major bitcoin exchange to stop customer withdrawals, citing “inconsistent results” and blaming a denial-of-service attack.

Benjamin Lawsky, superintendent of New York’s Department of Financial Services, unveiled in July new rules for virtual currency businesses that include capital requirements and a framework for permissible investments with consumer money.

The U.S. Internal Revenue Service has designated bitcoin, and other virtual currencies, as property for tax purposes, making it less attractive for investors to hold much value in bitcoin.

The Treasury Department’s Financial Crime Enforcement Network classified bitcoin exchanges as money transmitters, bringing them under the same rules that apply to businesses like Moneygram and Western Union.


The CFPB said virtual currencies pose numerous risks, including volatile exchange rates, noting that the bitcoin-to-dollar rate fell as much as 80 percent in one day in 2014. In about five years, the value of bitcoin has gone from just a few dollars to more than $1,000. In August 2012, the exchange rate for one bitcoin was about ten dollars. As of last week, the exchange rate stood at $450.

The agency also warned about the lack of help for consumers if such currencies are stolen, the risk of hackers and scammers trying to gain access to a user’s virtual wallet, and obscure transaction fees charged by currency exchanges.

CFPB also announced that it now stands ready to assist consumers with complaints against bitcoin service firms.

“The CFPB will use the complaints to help enforce federal consumer financial laws and, if appropriate, take consumer protection policy steps,” the agency said.

The consumer-finance regulator will try to address the concern with the appropriate company, or forward it on to the regulator with appropriate jurisdiction.


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