Your Money

Virtual Currency: 5 Things to Consider

Posted
10/27/2014
Although virtual currencies like Bitcoin, Dogecoin and XRP have been receiving a lot of press lately, many people are unaware of what they are, how they're used or the risks associated with them. Virtual currencies are electric money with growing global acceptance, even though they aren't tied to actual coins or bills. They offer an innovative, inexpensive and flexible method of payment via the internet. However, due to how these funds are exchanged and their dependence on the processing power of vast networks of private computers around the world, they pose a challenge to regulators and can cause certain issues for those who adopt them as a payment method.

Virtual currencies are not kept in banks or credit unions, but rather "digital wallets" which are identified by "public keys". Public keys are letter/number sequences that everyone can see on a virtual public ledger called a "blockchain" – similar to a spreadsheet. To access your virtual currency you have "private keys" which unlock your digital wallet in order for you to send someone a payment. Essentially, your private keys are your virtual currency so keeping them secure is essential to owning and using virtual currency.

Before using virtual currency, we recommend you consider the following:
 

1. Know Who You're Buying From and What the Actual Price Will Be

If you decide to buy something using your virtual currency it is important you verify the currency exchange is registered with the Financial Crimes Enforcement Network (FinCen) as a money services business. You can confirm an exchange is registered on the FinCen website as well as with your state's financial regulators, if your state requires such exchanges be licensed. Please note that even though a virtual currency exchange is registered, it may not be trustworthy. Some virtual currency exchanges do not identify their owners, phone number, address or the country where they're located. If you have an issue when you make a purchase from one of these exchanges, it would be difficult, or impossible, for you to contact the seller.

You should also understand the exchange rate, mark-ups or any fees associated with the transaction. Virtual currency, such as Bitcoin, has had enormous price fluctuations since its inception. You should question how long it will take to complete a transaction and what will happen if rates change before the transaction is finished.
 

2. Transactions May Not Be Anonymous

Every Bitcoin transaction is publicly shared and stored forever. Therefore, it is plausible that a person might be able to link your transactions to your public keys, other transactions you've made, or even your computer's IP address. Using this information, others also might be able to approximate the amount of Bitcoin you own and where you live.
 

3. Virtual Funds Can Be Stolen or Lost

Because virtual currency is data stored on your computer, it's susceptible to digital thieves. If hackers gain access to your computer through a virus or malware, they could potentially obtain your private keys and steal your virtual currency. Unlike credit and debit cards, your virtual currency is not backed by a payment card company, bank or credit union that will assist you in recovering your funds if they're stolen. There's no other party to help you should you fall victim to this crime.

You can lose your virtual funds even if you aren't hacked. Losing your private keys equates to losing access to your funds. If you forget your private keys or the method you use to store your private keys is lost or destroyed, you will lose your funds. No one can help you access those funds again or refund your loss.
 

4. Virtual Currency is Not Insured by the Government

The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) protect your assets if your bank or credit union fails. However, there is no agency that provides the same coverage for virtual currency. If a wallet company or a virtual currency exchange flops –which has happened several times since virtual currency originated, your losses will not be covered.
 

5. Mistakes are Costly

Due to the nature of how virtual currency works, mistakes can be extremely costly. For instance, when you attempt to pay for goods or services with your virtual currency you must enter the recipient's 64-character public key accurately or you will send funds to the wrong person or business. There are hosted wallet providers that help you manage your private keys and have methods for stopping or reversing such an error. But, if you do not use one of these hosted wallets or if you have a wallet provider that disclaims responsibility for such user errors, you may not get your money back.

Virtual currencies may be adopted more widely with better regulation in the future –in the meantime, it is wise to use these payment methods with caution. We urge you to research virtual currency thoroughly before entering the virtual currency marketplace. For more information on how virtual currencies work visit the Financial Action Task Force (FATF) website. If you already use virtual currency and have encountered a problem, you can submit a complaint online at http://www.consumerfinance.gov/complaint/.