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Virtual Currency Has Real Life Risk

Virtual Currency Has Real Life Risk

Virtual Currency Has Real Life Risk

Virtual currency—like the increasingly popular "Bitcoin" and lesser known offshoots like "Litecoin" - sound harmless enough.  But what was once used only by technophiles is becoming more common place as more and more merchants are accepting virtual currency in exchange for goods and services.  For example, Bitcoin ATMs are popping up in a number of cities and major online retailers (like Overstock.com and Expedia) have started accepting payment in Bitcoin.  However, before purchasing any virtual currency or otherwise jumping on the virtual currency bandwagon, educate yourself so you can make an informed decision about what you are getting into.  Virtual currency carries a significant amount of real-life risk.      

What is Virtual Currency?

"Virtual" or "digital" currency is an electronic medium of exchange that can operate like a currency, but does not have all the attributes of real currency.  If the marketplace perceives that it has value, virtual currency can be transmitted and exchanged in lieu of real currency for goods and services.  It can also be exchanged for real currency.  However, virtual currency is not legal tender and is not issued or backed by any central bank or governmental authority. 

What to Consider Before Using Virtual Currency

  • Virtual Currency Can Be Lost or Stolen.  Failing to keep your virtual "wallet" secure can result in losing all of your virtual currency.  Unlike a bank account, virtual currency wallets are not insured against loss by a bank or government.  The loss can occur because of a computer crash or a malicious attack on your computer.  Therefore, keep your virtual currency backed-up, if possible, and secure and do not invest more than you can afford to lose.
  • The Value is Volatile.  Because virtual currency is not backed by a commodity or central bank, its value can fluctuate greatly.  In fact, virtual currency has the potential to completely lose its value.  Given the nature of virtual currency, value fluctuations can happen quickly and without warning.
  • Tax Implications.  The IRS has announced that virtual currency is not actual currency and is instead treated as property for U.S. federal tax purposes.  Therefore, the general tax principles that apply to property apply to virtual currency.  As such, users of virtual currency need to determine any gains or losses associated with owning virtual currency. Additional information about tax implications can be obtained from the IRS's Virtual Currency Guidance.  You should consult with an accountant regarding any tax implications of transactions using virtual currency. 
  • No Consumer Protections.  Many companies that exchange virtual currency to real currency are not regulated by any government agency, nor are they insured against loss.  For example, Mt. Gox, which was the largest exchange for Bitcoin, suddenly closed its website in February 2014 and initiated a form of bankruptcy proceedings.  Mt. Gox also announced that millions of dollars' worth of Bitcoin had been stolen.  At this time, there are no regulations in place to protect consumers harmed by these types of situations.  Additionally, unlike credit card transactions, the majority of virtual currency transactions cannot be disputed or reversed.

Because it is not real currency, virtual currency should be treated like an investment.  As with any investment decision, you should thoroughly research virtual currency before investing your hard-earned money.  Both the SEC and FINRA have issued alerts with more information about the investment risks involved with virtual currency. 

Investors should also check with the Michigan Department of Licensing and Regulatory Affairs – Bureau of Corporations, Securities & Commercial Licensing for information about investments involving virtual currency.  Additional information regarding virtual currency is available at the Michigan Department of Financial Services webpage.

Contact The Attorney General's Consumer Protection Division 

Consumers may contact the Attorney General's Consumer Protection Division at:

Consumer Protection Division
P.O. Box 30213
Lansing, MI 48909
517-335-7599
Fax: 517-241-3771
Toll free: 877-765-8388
Online complaint form