The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to make investors aware about the potential risks of investments involving Bitcoin and other forms of virtual currency. The rise of Bitcoin and other virtual and digital currencies bitcoin revenue new concerns for investors. Potential investors can be easily enticed with the promise of high returns in a new investment space and also may be less skeptical when assessing something novel, new and cutting-edge. We previously issued an Investor Alert about the use of Bitcoin in the context of a Ponzi scheme.
Investor Alert cautioning investors about the risks of buying and using digital currency such as Bitcoin. Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government. The IRS recently issued guidance stating that it will treat virtual currencies, such as Bitcoin, as property for federal tax purposes. If you are thinking about investing in a Bitcoin-related opportunity, here are some things you should consider.
Investments involving Bitcoin may have a heightened risk of fraud. Innovations and new technologies are often used by fraudsters to perpetrate fraudulent investment schemes. Investors may find these investment pitches hard to resist. In July 2013, the SEC charged an individual for an alleged Bitcoin-related Ponzi scheme in SEC v. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.
An unsolicited sales pitch may be part of a fraudulent investment scheme. Federal and state securities laws require investment professionals and their firms who offer and sell investments to be licensed or registered. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. No net worth or income requirements. The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Most registration exemptions require that investors are accredited investors.
Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money. Bitcoin users may be targets for fraudulent or high-risk investment schemes.
Both fraudsters and promoters of high-risk investment schemes may target Bitcoin users. Fraudsters target any group they think they can convince to trust them. Scam artists may take advantage of Bitcoin users’ vested interest in the success of Bitcoin to lure these users into Bitcoin-related investment schemes. Similarly, promoters may find Bitcoin users to be a receptive audience for legitimate but high-risk investment opportunities. Using Bitcoin may limit your recovery in the event of fraud or theft. If fraud or theft results in you or your investment losing bitcoins, you may have limited recovery options. Third-party wallet services, payment processors and Bitcoin exchanges that play important roles in the use of bitcoins may be unregulated or operating unlawfully.
Law enforcement officials may face particular challenges when investigating the illicit use of virtual currency. Bitcoin transactions, making it more difficult to follow the flow of money. Bitcoin transactions and users span the globe. SEC can use the information and it may take more time to get the information. In some cases, the SEC may be unable to obtain information located overseas.
As there is no central authority that collects Bitcoin user information, the SEC generally must rely on other sources, such as Bitcoin exchanges or users, for this type of information. Law enforcement officials may have difficulty seizing or freezing illicit proceeds held in bitcoins. Bitcoin wallets are encrypted and unlike money held in a bank or brokerage account, bitcoins may not be held by a third-party custodian. Investments involving Bitcoin present unique risks.
Bitcoin exchange currently do not have similar protections. The exchange rate of Bitcoin historically has been very volatile and the exchange rate of Bitcoin could drastically decline. Bitcoin-related investments may be affected by such volatility. Federal, state or foreign governments may restrict the use and exchange of Bitcoin. Bitcoin exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. Bitcoins also may be stolen by hackers. As a recent invention, Bitcoin does not have an established track record of credibility and trust.