The Financial Industry Regulatory Authority issued an investor alert this week about the risks of buying and speculating in Bitcoin and other digital currencies, according to Jeff Neuburger in Proskauer Rose’s New Media and Technology Law Blog. The true identity of the digital currency’s founder—Satoshi Nakamoto—may or may not be a secret, but FINRA says the risk of fraud and cybercrime is no mystery.
The alert warns investors that digital currencies are not legal tender and “if the trust built up among individual users and businesses should vanish, bitcoins would be valueless,” says Neuburger. Additionally, online exchanges are “magnets for cyberthieves” as there are no safeguards with the service providers and bitcoin transactions cannot be reversed, therefore “refunds are contingent on the willingness of the parties,” he says.
The valuation of Bitcoin is also problematic, since it’s not uniform across the exchanges and is extremely volatile, and events like the collapse of Mt. Gox, a Bitcoin exchange, affect it dramatically, warns FINRA.
Neuburger reports that this alert “comes on the heels of the New York Department of Financial Services announcing that it is accepting formal proposals to operate digital currency exchanges in New York” and will establish oversight of the industry.