UPDATE 1-U.S. watchdog calls bitcoin 'Wild West' of finance

Mon Aug 11, 2014 2:08pm EDT

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(Adds background on virtual currencies, details from CFPB statement)

By Douwe Miedema

WASHINGTON Aug 11 (Reuters) - Virtual currencies such as bitcoin are the "Wild West" of financial products because of risks including huge swings in exchange rates, the U.S. Consumer Financial Protection Bureau said on Monday.

"Virtual currencies are not backed by any government or central bank, and at this point consumers are stepping into the Wild West when they engage in the market," CFPB Director Richard Cordray said in a statement.

In a consumer advisory, the agency noted that bitcoin fell as much 80 percent against the U.S. dollar in a single day this year, exposing investors to massive potential losses.

Other risks include the fact that online or virtual currencies have been a target for hackers while some virtual currency companies have provided little help in cases where funds were lost or stolen, the CFPB said.

Bitcoin, the best-known virtual currency, started circulating in 2009. Incidents that have brought the currency under new regulatory scrutiny include the failure of Mt. Gox, a Tokyo-based exchange that filed for bankruptcy after losing an estimated $650 million worth of customer bitcoins.

Unlike conventional money, bitcoin is generated by computers and is independent of control or backing by any government. That is something its proponents like, but it has led to calls for more oversight and guidance on issues including U.S. tax treatment.

The U.S. Treasury Department's Financial Crimes Enforcement Network last year classified administrators or exchangers of bitcoin as money transmitters, which puts them under the remit of state regulators.

The Commodity Futures Trading Commission, a federal regulator, is studying whether it has jurisdiction, given that some firms are considering offering bitcoin derivatives.

And the U.S. Internal Revenue Service has designated bitcoin and other virtual currencies as property, not currency, for tax purposes, a decision that made it less attractive to for investors to hold much value in bitcoins.

But the CFPB, a federal agency set up after the 2007-09 financial crisis, had so far been mum on the issue, causing a rebuke from the Government Accountability Office, which said last month the CFPB should step up its role in overseeing bitcoin.

The GAO's report had been requested by Senator Tom Carper, a Democrat from Delaware, and the head of the Senate Committee on Homeland Security and Government Affairs. Carper is conducting his own investigation into bitcoin.

(Reporting by Douwe Miedema; Editing by Chizu Nomiyama and Tom Brown)

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