The Consumer Financial Protection Bureau (“CFPB”) recently issued a consumer advisory summarizing the purported risks of virtual currencies, and announced that it would begin collecting complaints from the public regarding companies that offer products and services related to virtual currency payment technologies. More than sixteen months after the Financial Crimes Enforcement Network issued guidance on convertible virtual currencies to address money laundering concerns, the CFPB advisory follows on the heels of the publication of proposed rules for virtual currency companies by the New York Department of Financial Services. The CFPB announcement is significant because it is the first time a federal regulator has officially recognized the importance of adequate consumer protections for users of virtual currency products and services. While the advisory does not represent an official endorsement of any aspect of the virtual currency economy by the CFPB, it does serve as a tacit acknowledgement of the growing relevance of, and appeal of virtual currency technologies to, consumers.
The advisory emphasizes that virtual currencies like Bitcoin are not backed by any central bank and may lose value, may be susceptible to theft by hackers, and may cost users more to transact with than fiat currency. The advisory supplied several vignettes describing negative consumer experiences with the leading virtual currency, Bitcoin. Despite large investments by U.S.-based entrepreneurs to establish consumer-friendly, secure products and services that comply with existing state and federal regulations, CFPB Director Richard Cordray stated that consumers using virtual currencies are “stepping into the Wild West when they engage in the market.” The advisory provided a high-level description of how virtual currencies work, but did not provide vignettes of the numerous types of ordinary transactions conducted by consumers using virtual currencies like Bitcoin. The advisory did not identify the statutory authority the CFPB might have to regulate Bitcoin products and services, nor did it hint at whether the CFPB intends to propose virtual currency-specific regulations.
After pointing out the risks inherent with owning and using virtual currency, the CFPB advisory warned consumers to:
- Carefully vet buyers and sellers of virtual currency before transacting with them;
- Understand the true cost of transacting with virtual currency, and avoid dealing with companies that do not adequately disclose such costs;
- Be aware of the possibility of large fluctuations in the value of virtual currencies against the dollar, and to be prepared to lose money on significant investments in virtual currencies;
- Beware of virtual currency-specific scams;
- Understand the security risks inherent with owning virtual currency, and with entrusting your virtual currency assets to a third party;
- Understand that, unlike traditional banks, due to the irreversible nature of transactions in virtual currency, wallet providers may not be able provide refunds or even cancel a transaction after the transaction has been processed – for example, if you provide the wrong recipient address, the wallet provider will not be able to recover the funds;
- Learn more about the return policies and dispute resolution mechanisms of merchants who accept payment in virtual currency; and
- Be aware that the IRS treats virtual currencies like Bitcoin as property, and as such, consumers may be liable to pay capital gains taxes on virtual currency holdings.