SEC Warns of Fraud, Other Risks with Bitcoins

The U.S. Securities and Exchange Commission weighed in on bitcoins Wednesday. In an Investor Alert, it said the virtual currency "has the potential to give rise both to frauds and high-risk investment opportunities."

This new alert complements an earlier one from the federal agency, entitled "Ponzi Schemes Using Virtual Currencies." The SEC also referenced warning alerts on bitcoin from the Financial Industry Regulatory Authority and the North American Securities Administrators Association.

In this alert, the SEC assembled a sizable list of issues. It pointed out that "innovations and new technologies are often used by fraudsters to perpetrate fraudulent investment schemes."

Law Enforcement Challenges

Warning signs of such investment fraud, the SEC said, include a "guaranteed" high investment return, unsolicited sales pitches, unlicensed sellers, no net worth or income requirements, pressure to buy immediately, and a deal that "sounds too good to be true."

"Using bitcoin may limit your recovery in the event of fraud or theft," the SEC warned. The reasons, the agency said, include the fact that third-party wallet services, payment processors and bitcoin exchanges may be unregulated or even operating illegally.

Additionally, law enforcement after a bitcoin-related crime could face a number of challenges. This includes the difficulty in tracing money because traditional financial institutions are not involved, the international scope, no central authority for the decentralized currency, and the problems that law enforcement officials may have in seizing or freezing bitcoins.

And that's only part of the SEC's issues with bitcoins. The currency also has unique risks, the SEC said, including no governmental insurance for accounts holding bitcoins as there is in traditional bank accounts. There's also a history of volatility in the exchange rate, including a drop in a single day of more than 50 percent.

Plus: Governments of any kind might restrict bitcoin use, and the currency, being new, does not have...

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