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SEC offers list of Bitcoin risks topped by fraud, regulation issues

updated 03:27 pm EDT, Wed May 7, 2014

Investor alert issued to raise investor awareness of virtual currency risks

The United States Securities and Exchange Commission (SEC) has issued another investor alert on Bitcoin that follows on from a previous publication. Both warn potential investors of the risks of the virtual currency. Offering a long list to support their alert, the SEC draws more references to the Ponzi scheme nature of the currency, the probability of fraud and what the lack of regulation means.

In the report, the SEC states that "a new product, technology, or innovation -- such as Bitcoin -- has the potential to give rise both to frauds and high-risk investment opportunities." The alert's intent is to inform investors of some of the more negative aspects of cryptocurrency in a general manner. The SEC is quick to point out that the fraud risk of any of the emerging currencies is high. However, that doesn't mean that the SEC lacks an understanding for how Bitcoin or other virtual currencies work.

While giving the warning signs of potential fraud, like investments and the pressures to invest, the SEC points out some of the more volatile reasons why Bitcoin may be an unwise investment. Pointing to the vast swing in value compared to the US dollar since the creation of Bitcoin, the commission warns that this information can be used selectively to gain the trust of susceptible investors. Not only could these be new clients, but those who invested early and gained unexpected wealth with these virtual currencies.

Lack of regulation also means that the chances of the return of funds invested in fraudulent schemes is slim to none. Even though the SEC keeps records of many types of investments home and abroad, many Bitcoin investments may be initiated by unlicensed sellers with no registrations through the SEC for securities offerings. The issue is complicated, since the currency transcends national boundaries -- making it a hard currency to regulate, even if it had government oversight. Tracing stolen funds or having law enforcement attempt to freeze accounts may be next to impossible.

Littered in the report are other instances where virtual currencies have run afoul of investors and governments. These examples, including Mt. Gox's bankruptcy filing in Japan and the SEC trading suspension of Imogo Mobile Technologies, give context to the situations the SEC is drawing attention to. Even though the currencies are growing, they are vulnerable to higher-scale frauds done to manipulate markets.

No specific action is announced in the report, but the movement of yet another warning from the SEC on the unregulated virtual currencies should give potential investors some pause.

By Electronista Staff
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