October 15, 2013 / 9:03 PM / 6 years ago

State, provincial regulators raise red flags on virtual currency

(The author is a Reuters contributor. The opinions expressed are his own.)

By Neil Stempleman

Oct 15 (Reuters) - Consumers may be headed for trouble when they turn over bank and brokerage pass codes to investment advisers or get pulled into investment scams involving digital currencies, state securities regulators said.

The North American Securities Administrators Association on Tuesday added the two technology-related issues to its annual list of top investor threats, where they joined the ongoing catalog of risks the NASAA has highlighted in previous years, including oil and gas drilling and real estate investment schemes.

The regulators’ organization said digital currencies, such as Bitcoin, offer consumers another way of paying for goods and services, but they also provide a “fertile ground for scam artists to capitalize on ... (their) increasing popularity and acceptance.”

The regulators said that digital currencies are highly volatile and the concept is difficult for even the sophisticated investor to understand.

Bob Webster, director of communications for the association, said the warning was not about using Bitcoins or other virtual currencies, but about con artists using Bitcoin as a cover or investment lure.

Putting virtual currencies on the association’s list will “raise some flags, (and) put this on investors watch,” he said. “Investors should try to learn and understand more about Bitcoin.”

Bitcoin’s website notes the volatility of the currency, and risks from trying to get rich from using the new currency. The website also says, “Bitcoin has no official organization, individuals with authority, nor spokespeople.”

A co-founder of BitPay, a company that specializes processing Bitcoin payments, agreed with the NASAA’s assessment of the danger from virtual currencies. Stephen Pair, who is also BitPay’s chief technology officer, said in an email: “For anyone that does not understand decentralized, cryptographic currencies like Bitcoin, it is not a good idea to invest in them.”

“Aside from the fact that they are very new with a short track record, safely storing large amounts of them requires skill and experience in computer security,” he said. “The NASAA is correct in stating that scam artists are attempting to capitalize on the rising popularity of Bitcoin.”


Whenever an account is created, banks and brokerages warn about the dangers of giving out a user name and password to a stranger, but investors do not always listen.

The NASAA warned against “allowing an unlicensed individual to have access to the username and password for your brokerage account or worse, allowing an unlicensed individual to set up a brokerage account in your name.”

Brokers working for major firms are licensed and bonded.

The association said investors should check with their state securities regulator to confirm that anyone seeking to manage their account is properly registered.


The top threat to investors is still fraudulent private placement offerings, the association said. These offerings are commonly called Reg D/Rule 506 offerings, after the federal securities law that allows private placements without registration. The association said these are “limited investment offerings that are highly illiquid, generally lack transparency and have little regulatory oversight.”

While the offerings are used by many legitimate companies to raise capital, “they carry high risk and may not be suitable for many individual investors,” the association said.

That is significant now, because recent U.S. laws have relaxed restrictions on how these offerings can be marketed, and “investors soon will begin to see advertisements for private placement offerings on a variety of platforms including social media, billboards, or t-shirts on window washers as one startup has proposed, even though only a very small percentage of the population will be eligible to invest,” the group said.

Other top threats listed by the association included high-yield investment and Ponzi schemes, scam artists using self-directed IRAs to mask fraud, and risky oil and gas drilling programs.

The association's members include state and provincial regulators in the United States, Canada and Mexico. The threat list is based on anecdotes and complaints from investors, and enforcement data collected by these regulators. Webster said the association would be releasing enforcement data on these threats in a few weeks. (Follow us @ReutersMoney or here Editing by Linda Stern and Steve Orlofsky)

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