Virtual currency, which includes digital and crypto-currency are gaining in both popularity and controversy. Thousands of merchants, businesses and other organizations currently accept Bitcoin, one example of crypto-currency, in lieu of traditional currency. An ATM in Las Vegas and the arena of the NBA’s Sacramento Kings professional basketball team both accept Bitcoin.
Two attractive characteristics of virtual currency are lower transaction fees and greater anonymity. However, virtual currency is not without risk. Bitcoin exchanges claim to have suffered losses from hacking. MtGox, one of the largest Bitcoin exchanges, recently shut down after claiming to be the victim of hackers and losing more than $350 million of virtual currency. Despite the controversy, virtual currency may find its way into your e-Wallet.
What is Virtual Currency?
Virtual currency is an electronic medium of exchange that, unlike real money, is not controlled or backed by a central government or central bank. Virtual currency includes crypto-currency such as Bitcoin, Ripple or Litecoin. These currencies can be bought or sold through virtual currency exchanges, used to purchase goods or services where accepted and are stored in an electronic wallet, also known as an e-Wallet.
An e-Wallet is a digital system that allows payments online via a computer or mobile device such as a smartphone. While in some instances virtual currency has been recognized as a monetary equivalent, the Internal Revenue Service has announced that it would treat virtual currency as “property” and not “currency” for tax purposes.
Risks Associated With Virtual Currency
As with all investments, those tied to virtual currency have risk. Some common concerns and issues you should consider before investing in any product containing virtual currency include:
Virtual Currency as an Investment
Schemes Involving Virtual Currency
The Securities and Exchange Commission took action against a man in Texas who convinced others to give him their Bitcoin holdings in exchange for the promise of receiving even more Bitcoins in the future, plus seven percent interest a week. The scam was exposed when the promoter was not able to pay the promised returns (See S.E.C. v. Shavers, et al.)
The Bottom Line
It pays to do your homework before you invest in any investment opportunity, including virtual currency. If you have any questions about investing in virtual currency, contact your state or provincial securities regulator. Contact information is available on the website of the North American Securities Administrators Association, here.
To learn more about virtual currency, additional resources are provided below: