State of Connecticut Department of Banking

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DEPARTMENT OF BANKING ISSUES CONSUMER ADVISORY
ON VIRTUAL CURRENCY
The Risks of Buying, Investing in and Trading Virtual Currencies, such as Bitcoin

May 12, 2014

The Department of Banking today issued an advisory cautioning investors to consider the risks associated with virtual currencies.  Virtual currency, which includes digital and crypto-currency, are gaining in both popularity and controversy. Growing numbers of merchants, businesses and other organizations currently accept Bitcoin, one example of crypto-currency, in lieu of traditional currency.  The advisory is available at www.ct.gov/dob.

“The value of virtual currencies is highly volatile; the concept behind the currency is difficult to understand even for sophisticated financial experts. Individuals should be aware that using or investing in virtual currency presents very real risks, including a total loss of value,” said Commissioner Howard Pitkin.  “Unlike traditional currency, these alternatives typically are not backed by tangible assets, are not issued by a governmental authority and are subject to little or no regulation.”

Before buying, investing in or trading virtual currencies consumers should consider:

  1. Volatility. One of the major risks of holding virtual currencies is their volatility. Their value can rise or fall substantially over a short period of time. Bitcoin, the most well-known virtual currency in the market, traded for $13 in January 2013, $100 in July 2013, over $1,100 in December of 2013 and is now valued at $427 as of May 2014.  Bitcoins, and others like it, are basically lines of computer code that are valued by the marketplace with no governmental support or oversight. Anyone holding virtual currencies should understand that they could lose their investment as the market changes.
  2. No Deposit Guarantee. Virtual currency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000.  Once the funds are gone, there is no way to retrieve them and no way to make the consumer whole.
  3. Lack of Protection for Digital Wallets. Some exchange companies that offer to store the consumer’s virtual currencies in virtual wallets have been unable to protect them. There are already a number of well publicized instances where consumers have lost all their funds in digital wallets.
  4. Connection to Criminal Activity. Because virtual currencies provide some anonymity, criminal elements appear to have used them for money laundering and other crimes. When exchanges are shut down as a result of either knowingly or unknowingly facilitating a crime, customers may have difficulty accessing their funds.
  5. Tax Implications. The Internal Revenue Service (IRS) issued guidance on March 25, 2014 regarding virtual currency.  Individuals should consult their tax advisor or contact the IRS directly for questions regarding the tax implications of virtual currency.

For more information about the risks associated with virtual currency, visit www.ct.gov/dob or contact the Department of Banking at 860-240-8170 or toll-free, at 1-800-831-7225.