CFPB warning: Bitcoin a 'Wild West' for investors

Federal regulators are warning consumers about the risks of using virtual currencies such as Bitcoin.

The Consumer Financial Protection Bureau said Monday that it will begin fielding complaints from people who rely on products such as bitcoin and online exchanges for such currencies.

In issuing an advisory warning, the agency noted that the currencies are not backed by the government, have volatile exchanges rates and are targeted by hackers and scammers. And unlike bank accounts, bitcoin-based deposits are not federally insured.

"Consumers are stepping into the Wild West," CFPB Director Richard Cordray said in a statement.

Still, Cordray acknowledged that virtual currencies "may have potential benefits," noting that they facilitate online transactions by making it easier to process payments.

The Securities and Exchange Commission previously issued an investor alert about Ponzi schemes involving virtual currencies.

Advocates for virtual currencies said they thought the CFPB's characterization of the currencies was generally fair.

Jim Harper, global policy counsel for the bitcoin Foundation, called the CFPB's warning "pretty standard." He noted that it's "helpful to the extent that it informs consumers without scaring them."

"There are consumer risks around new technologies, and even-keeled educational material from government agencies can help make consumers aware and savvy," Harper said.

The CFPB's warning noted that bitcoin prices can be highly volatile. In one day last year, it said, prices dropped as much as 61 percent.

But Harper said such volatility should wane in the next 10 to 15 years if virtual currencies become more common.

In mid-July, the New York Department of Financial Services became the first state to begin the process of regulating the online currency. The agency is accepting public comments from July 23 to September 6. Then, after making necessary changes, the regulations will be put in place.

“We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation," Mr. Lawky said. "Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.”

In March, the Internal Revenue Service said it does not consider bitcoin to be a currency. Instead, it will tax bitcoins as property.

"In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction," the IRS briefing read.