Designed as an alternative to current payment systems, digital currencies, such as Bitcoin, XRP and Dogecoin, are a way for people to track, store and send payments over the internet. They are intended to make payment processing cheaper and faster.
Virtual currency companies have sprung up around the world in the last two years to offer products and services to consumers, reaching the world of sportsstudents at Georgia Tech University in Atlanta, for example, will no longer need to stop by the ATM on their way to games to pay for snacks and drinks when heading to a football game. And earlier in 2014, the Sacramento Kings became the first professional sports franchise to accept Bitcoin.
Despite this movement into mainstream culture, there remain several risks associated with using virtual currencies. First and foremost, virtual currencies are not backed by any government or central bank. Therefore, because digital currencies are not backed by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, if a digital currency company failsas many havethe government will not cover the loss.
In fact, the Consumer Financial Protection Bureau (CFPB) recently issued a consumer advisory warning consumers about the risks of virtual currencies such as Bitcoin. The potential risks include the threat of hacking and scams, volatile exchange rates, unclear costs, and the risk that companies offering virtual currencies may not offer help or refunds for lost or stolen funds. The CFPB also announced that consumers who encounter problems with a virtual currency may now submit a complaint with the Bureau.
When dealing with a virtual currency company, consumers should carefully consider the following:
Beware of Hackers and Scammers. Virtual currencies are targets for sophisticated crooks. For example, if a hacker gains access to a consumer's Bitcoin "private keys," or the 64-character codes that unlock the consumer's funds, the consumer can lose all of his or her virtual currency.
Beware of who you are dealing with. The CFPB warns that some virtual currency companies do not identify their owners, provide phone numbers or addresses, or even specify the country in which they are located. Therefore, before using a companys products or services, users should carefully consider whether they will be able to contact the company in the event of a problem.
Carefully review the contracts. Users should review the contractual rights between virtual currency companies. Some companies contractually disclaim responsibility for consumer losses if the funds are stolen or lost.
Beware of Rate Fluctuation. The exchange rates of bitcoin to U.S. dollars fell as much as 61% in a single day in 2013, and as much as 80% in 2014. The CFPB has also warned about mark-ups and other fees that some exchanges charge.
Victor Johnson is a member of the Intellectual Propert & IP Litigation Practice Group for the Dallas office of Dykema Gossett PLLC, and Zackary Hoard is a senior attorney in the same group.