Demystifying Virtual Currencies

05/01/2018 6:00 am EST

Focus: CRYPTOCURRENCY

Dan Rutherford

Deputy Director, Office of Customer Education and Outreach, U.S. Commodity Futures Trading Commission

 

One of the most recent marketplace developments driving a lot of interest is the rise in prominence of virtual currencies, specifically bitcoin. But what exactly are virtual currencies and what are the risks of trading them?

What are virtual currencies?

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.  

Some virtual currencies have an equivalent value in other currencies, such as U.S. dollars or euros, or can be traded for other virtual currencies. These are referred to as convertible virtual currencies. Bitcoin is an example of a convertible virtual currency.

When you buy or sell virtual currencies with dollars from your personal wallet, you are buying on the cash or spot market. Virtual currencies can also be purchased through initial coin offerings or ICOs.   

Virtual currencies have been determined to be commodities under the Commodity Exchange Act. While its regulatory oversight authority over commodity cash markets is limited, the U.S. Commodity Futures Trading Commission (CFTC) maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.

Risks in buying virtual currencies:

Purchasing virtual currencies on the cash market comes with a number of risks, including:

  • Most cash markets are not regulated or supervised by a government agency.
  • Trading platforms may lack customer protections or safeguards against market manipulation.
  • Extreme price volatility or “flash” crashes.
  • Platforms selling from their own accounts and putting customers at a disadvantage.

Beware of fraud:

There may be no recourse if your virtual currency is stolen.

  • Virtual currencies are commonly targeted by hackers and fraudsters.
  • Do not invest in products you do not understand.
  • There is no such thing as a guaranteed investment or trading strategy.
  • Some initial coin offerings can be used to improperly entice investors with promises of high returns.
  • If someone says they are a broker or advisor, check their registration at SmartCheck.gov.

Suspect fraud?

If you believe you may have been the victim of fraud, or to report suspicious activity, contact us at 866-366-2382 or visit SmartCheck.gov/submitatip.

This article was prepared by the Commodity Futures Trading Commission’s Office of Customer Education and Outreach. The article is provided for general informational purposes only and does not provide legal or investment advice to any individual or entity. Please consult with your own legal adviser before taking any action based on this information.

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