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Minnesota Commerce Department cautions investors about Bitcoin and other virtual currencies

12/9/2015 9:46:06 AM

Virtual currencies such as Bitcoin are gaining in both popularity and controversy. Because these are new and complex financial products, they can potentially be exploited for fraudulent or high-risk investment schemes that victimize unwary investors. 

The Minnesota Department of Commerce is urging Minnesotans to proceed with caution and understand the potential risks of any investment or transaction involving a virtual currency such as Bitcoin. 

What is virtual currency?

Virtual currency is an electronic medium of exchange that, unlike real money, is not issued, controlled or backed by a central government or central bank. These currencies can be bought or sold through virtual currency exchanges, and they can be used to purchase goods or services from businesses that accept them.

What are the risks?

Like any investment, those tied to virtual currency have risks. Some key issues you should consider before investing in any product containing virtual currency include:

  • Virtual currency is currently subject to minimal regulation, susceptible to cyberattacks and there may be no recourse should the virtual currency disappear. 
  • Virtual currency accounts are not protected by the Federal Deposit Insurance Corporation (FDIC), which insures bank and credit union deposits. 
  • Investments tied to virtual currency may be unsuitable for most investors due to their volatility.
  • Investors in virtual currency will likely be doing business with unregulated businesses that may be more susceptible to fraud and theft than regulated financial institutions. 
  • Because of the anonymity they allow, some virtual currency exchanges have been used for illegal activity such as drug dealing and money laundering. If law enforcement shuts down or restricts the use of an exchange, it will affect other consumers and investors.
  • Despite its name, virtual currency is considered by the IRS to be a form of property and must be reported as such on federal taxes.

Virtual currency as an investment?

Virtual currency can be used as an investment in essentially the same way as gold or other commodities. Investors may purchase virtual currency with the expectation that it will sell for a higher price in the future. Virtual currency may also be used in Exchange Trade Funds (ETFs) and financial derivatives.

These investments can be highly speculative and risky because virtual currency values often fluctuate dramatically and unpredictably. 

As with any investment, you should be alert for warning signs of potential fraud such as unsolicited sales pitches or promises of “guaranteed” profits. If an offer sounds too good to be true, it probably is.

Commerce is here to help

If you believe you may have been the victim of a scam or fraud, contact the Commerce Department’s Consumer Services Center by email at consumer.protection@state.mn.us or by phone at 651-539-1600 or 800-657-3602 (Greater Minnesota).

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