The Massachusetts consumer affairs office on Tuesday issued a consumer alert about the bitcoin virtual currency.
The alert was sparked by the crash of bitcoin exchange Mt. Gox and the bitcoin ATM that recently opened in Boston’s South Station. The office said it’s reviewing the Liberty Teller bitcoin ATM to determine if it requires licensing. Meanwhile, a second bitcoin ATM made by the company, in Cambridge’s Harvard Square, opened this week.
The state’s warning itself probably contains no new information for the tech savvy, but I’m assuming that’s not who the alert is targeted at.
This wasn’t exactly a rapid response from the state, either — bitcoin has been growing in popularity for years, while the South Station ATM and the Mt. Gox meltdown are weeks old at this point.
But it’s still perhaps notable, from a tech sector perspective, that the state decided to say anything at all. Many in the tech community have heralded bitcoin and digital currency overall as an emerging front; Jeremy Allaire, founder of Boston digital currency startup Circle (and formerly founder of Brightcove), is among those entrepreneurs seeking to bring bitcoin into the mainstream.
Here is a portion of the alert from the state:
The Office of Consumer Affairs and Business Regulation advises consumers who may consider purchasing the digital or virtual currency Bitcoin to proceed with caution because of the high-financial risks involved.
Just last week, the largest Bitcoin exchange shut down resulting in hundreds of millions dollars’ worth of lost bitcoins. A couple of weeks ago, a Bitcoin “ATM” opened up in South Station. While this operation closely resembles an ATM, the kiosk performs quite differently. It does not provide cash, but instead allows consumers to load bitcoins onto a virtual wallet either accessed by an app downloaded onto a smartphone or through a code provided on a piece of paper that is unique to each consumer.
Proponents of Bitcoin make the point that this virtual currency allows for a faster, no-fee payment system, which is attractive to both merchants and consumers. While there is a demand for a faster and more efficient commercial payment system, the question is whether bitcoins are the most appropriate and safest alternative to satisfy that demand.
Before purchasing bitcoins either online or through a kiosk, consumers are strongly advised to consider the risks.
What risks should I be worried about?
Consumers should pay particular attention to the following risks:
- You can lose your money or bitcoins on an exchange: Consumer ramifications were seen first-hand when one of the largest Bitcoin exchanges, Mt. Gox, abruptly closed down recently with no explanation. It was later revealed the exchange was hacked, and millions of dollars of bitcoins were stolen. Consumers were left hanging as to how they could recoup their lost money. Mt. Gox recently filed for Chapter 11 bankruptcy and reorganization in the Northern District of Texas, so consumers now have a process under which they can file claims.
- Bitcoins can be stolen from your virtual wallet: Bitcoins are like cash – if they are lost or stolen, they are gone for good. If your virtual wallet is hacked, your bitcoins can be stolen. Also, if you forget your private “key” (similar to a PIN), your bitcoins are not replaceable.
- The value of bitcoins can fluctuate rapidly: During the time it took Consumer Affairs staff to inspect the South Station kiosk, the value of the average of the four most common Bitcoin exchanges fell $20 — it has since fallen hundreds of dollars. This rapid fluctuation means it is a high risk investment for consumers. The value could even drop to zero, making bitcoins worthless.
- There are no consumer protections: Bitcoins are not FDIC insured. Unlike credit cards, you have no right to reverse the charges if something goes wrong. The South Station kiosk also has no disclosures, leaving consumers without information about fees or where to go if there is a problem. The Massachusetts Division of Banks is currently reviewing the operation of this kiosk to determine if it requires licensing.