Consumer Financial Protection Bureau Issues Bitcoin Advisory

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Aug 11, 2014

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The Wild West-like Bitcoin market may soon be brought to heel in the United States as federal regulators show an increased interest in the popular digital currency.  The Consumer Financial Protection Bureau issued a statement this week that issued a consumer advisory on virtual currencies, and informed users that it would be accepting complaints about suspicious or fraudulent Bitcoin transactions.

Bitcoin Use Grows in Online Community

Introduced in 2009, Bitcoin is a virtual currency that does not have the financial backing of a private or government entity.  Bitcoins are “mined” by users with high powered computers by solving mathematical equations – each problem solved results in a new Bitcoin.  With the emergence of Bitcoins has come an online market on which the currency is bought, sold, and traded at whatever value the market sets.  Without any government regulation or financial backing, the digital currency market is unpredictable, volatile, and used heavily in illegal and illicit online transactions – particularly amongst online drug distribution organizations. 

While Bitcoins present tremendous opportunity for savvy members of the online market, the unpredictable nature of Bitcoin value inherently presents potentially dangerous fluctuations.  With values varying by the hundreds of dollars – currently they trade at $580 per Bitcoin – and the uncertainty about how potential government regulations will impact the market, consumers who wade into the Bitcoin pool take on financial risks.  With that in mind, the Consumer Financial Protection Bureau (CFPB) joins a growing list of US government agencies keeping an eye on virtual currencies, and this week’s statement reflects growing concern amongst authorities about the Bitcoin market.

Consumer Financial Protection Bureau Issues Bitcoin Warning

The CFPB advisory comes as no surprise – the Bitcoin market is popular, largely misunderstood, and incredibly volatile, leaving consumers who get caught up in the hype vulnerable to significant financial losses.  In its statement, the CFPB noted, “Virtual currencies may have potential benefits but consumers need to be cautious and they need to be asking the right questions. Virtual currencies are not backed by any government or central bank, and at this point, consumers are stepping into the Wild West when they engage in the market.”  The sentiment is supported by online currency experts who caution that a lack of government regulation leaves consumers without avenue to protect themselves against fraudulent transactions, widespread theft, or easily manipulated markets.

An interesting aspect of the CFPB’s advisory statement is the agency’s call for consumer complaints regarding Bitcoin transactions.  Currently there is not a regulatory structure in place that would give the CFPB explicit authority to remedy Bitcoin losses or punish fraudulent behavior, which suggests that the agency could be seeking out the opportunity to pass Bitcoin regulations.  If the CFPB is flooded with consumer complaints, the agency can, and likely will, make use of concerns by forming regulatory legislation that will give it a presence in the Bitcoin market.  Right now, both federal and state regulators are grappling with the problem of how to approach digital currencies, and a rash of consumer complaints could be the impetus the US government needs to get involved.

Federal and State Agencies Aware of the Bitcoin Market

As Bitcoin popularity grows, the CFPB is not the first and only agency to keep a wary eye on the digital currency market.  The IRS announced in March that it would tax Bitcoins as property, but not currency.  The Securities and Exchange Commission and the Financial Industry Regulatory Authority have both noted that Bitcoin is on their radar, but so far neither agency has taken any action to involve itself in the growing market.  New York has submitted proposed regulations for local Bitcoin traders that would require every company trading in Bitcoins to obtain a license and provide enhanced cybersecurity protections for its consumers.  Financial officials in New York claim that the regulations are designed to increase consumer confidence in the digital currency market by adding security and minimizing the risk.

Regulating Bitcoin is not without substantial challenge, largely because the digital currency community in international and operates beyond any existing jurisdictional boundaries.  If the US issues Bitcoin regulations that impact the market negatively, consumers could conceivably seek out foreign exchanges, leaving regulators perpetually chasing the market in order to enforce laws.  Critics of Bitcoin regulation also caution that government involvement would stifle growth of the digital currency exchange in the US – stunting the technological innovation and freedom that the market was designed to create. 

The Bitcoin market presents a uniquely challenging environment for American legislatures and agencies who are struggling to determine how, and if, they should approach virtual currency regulation.  The CFPB’s recent advisory serves a reminder of the government’s interest, potentially setting the stage for an interesting legal battle over the regulation of the growing Bitcoin market.

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