Legal & Economic Issues
- Is Bitcoin legal?
- Crypto taxes explained (U.S. specific)
- Is cryptocurrency regulated by consumer protection?
- What are the advantages of cryptocurrency?
- What are the limitations of cryptocurrency and the blockchain?
- Is Bitcoin a bubble? Is it too late to invest?
- Is Bitcoin a Ponzi scheme?
- Thoughts on BitConnect, USI-Tech, and similar programs
Is Cryptocurrency Regulated by Consumer Protection?
During his first inaugural address, Ronald Reagan spoke the words: “…government is not the solution to our problem; government is the problem.” The phrase is often quoted when someone is making an argument against government regulation or oversight. The portion of the quote that is purposely omitted are the words that began the quote: ”In this present crisis.” Reagan was speaking specifically about the present economic recession and was not claiming that government involvement was ‘the problem’ in all or even most cases. However, some do make that claim.
While many believe that the government should play as little a role as possible, some desire the absence of government and absolute freedom for the individual. Cryptocurrency was created to exist in such a space. Today virtual currency allows its users to both bypass the banking system and to be free of governments. But, there are risks to freedom, and to quote Ronald Reagan once more: “government exists to protect us from each other…[but not from ourselves].”
Being that cryptocurrencies are independent of governments or central banks, the opportunity exists for companies and/or individuals to behave unethically and because of anonymity, with impunity. So, what recourse, if any, is available to crypto investors who fall victim to scams? Do consumer protections exist for consumers who own bitcoin and other cryptocurrencies?
The Need for Consumer Protection
In an effort to meet aggressive sales goals, Wells Fargo employees fraudulently opened banking accounts without their customers’ consent or knowledge. By Wells Fargo most recent update (August of 2016), the total number of unauthorized accounts is 3.5 Million. These employees, also fraudulently opened over 500,000 credit card accounts. As a consequence of engaging in this widespread illegal activity, 5,300 employees were fired, Wells Fargo was fined by multiple regulators a total of $185 million dollars. The bank also agreed to pay full restitution to all victims.
Contrast that outcome with outcomes for similar or more egregious acts of fraud or malfeasance in the unregulated world of cryptocurrency. In January 2018, the group behind the Bitconnect platform executed an exit scam and absconded with over $2 billion dollars of their customers’ money. Stories abound about those on the platform who had not only invested their life savings but the savings of friends and family. Others were left heavily in debt, due to the fact that they had taken out loans to invest in the Bitconnect platform.
Although defrauding persons of their money is a crime, even in the world of cryptocurrency, the absence of regulators and the anonymity of cryptocurrency makes consumer protection essentially impossible and never assured. The victims of Bitconnect’s Ponzi scheme, the victims of the hack of Mt. Gox, of Parity Wallet and of Bitfinex will not recover their lost funds, although they can file charges with their respective governments.
Being that cryptocurrencies are independent of governments or central banks, the opportunity exists for companies and individuals to operate unethically and with impunity, because of anonymity. So what recourse, if any, is available to crypto investors who fall victim to scams? Do any consumer protections exist for consumers who invest in bitcoin and other cryptocurrencies?
What is Consumer Protection?
The term ‘consumer protection” refers to the laws and regulations designed to both protect and establish the rights of consumers. Some of those rights include:
- the right to safety
- the right to be informed
- the right to redress
- the right to satisfaction
In the United States, there are several agencies tasked with protecting consumers. The Federal Trade Commission, or FTC, serves as our nation’s consumer protection agency and administers many different consumer protection laws. The Consumer Financial Protection Bureau (CFPB) aims to make consumer financial markets work for consumers, responsible providers, and the economy as a whole. It protects consumers from unfair, deceptive or abusive practices and takes action against companies that break the law. The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits and examining and supervising financial institutions for safety and soundness and consumer protection. The FDIC insures deposits to at least $250,000 per insured bank.
What Risks Does Cryptocurrency Pose to Consumers?
First and foremost, the cryptocurrency space is nearly completely unregulated. Imagine an unregulated amusement park or airline. Imagine further that the operators of the unregulated amusement park or airline were completely unknowable. Now, it should not be hard to imagine the risks such operations could pose to the consumer. The ride would no doubt be exciting, but the outcome is not to be relied upon.
The truth is that the cryptocurrency market brings with it all the normal risks of financial investing, but it has the greater risk of no regulatory oversight or central bank, to stabilize its value. As a result, the cryptocurrency market is extremely volatile and can often experience wild swings. In 2013, Bitcoin’s price fell as much as 61% in a single day. In 2014, there was a one-day price drop of 80%.
In nearly all instances, cryptocurrency funds are uninsured. While the Coinbase exchange does insure their deposits through a third-party insurance company and complies with US regulations, on most nearly every other exchange, funds lost due to a breach or hack are simply lost forever. There is no FDIC protection for losses of cryptocurrency. Additionally, mobile devices linked to these hacked exchanges can also become vulnerable to hackers.
Without the benefit of reputable rating agencies, like Moody’s or S&P to provide unbiased insight, investing in an Initial Coin Offering (ICO) is risky for investors. It is not uncommon for the introduction of an ICO to simply serve as a cash grab. When attempting to do your due diligence, it can be very difficult to authenticate any of the details about the project or its team, therefore it is difficult to distinguish prospectus from propaganda.
What Protections are Already in Place?
Although cryptocurrencies are not tied or backed by the government, regulations and consumer protections are beginning to slowly emerge in the US, as well as other countries. This is in response to the increase in consumer complaints and the need to shield market participants from bad actors.
While regulation is still very limited, different countries and governing bodies are establishing a framework. The Financial Crimes Enforcement Network – which is part of the U.S. Department of Treasury — requires all virtual currency exchanges and kiosks to be registered with them. The Securities and Exchange Commission has indicated it views digital currency as a security. The Commodity and Futures Trade Commission says bitcoin is a commodity.
In Japan, exchanges are legal if they register the Japanese Financial Services Agency. It is working to build a template for how digital currency exchanges and ICOs should operate. Although China has banned all ICOs, the Chinese Ministry of Industry and Information Technology released its first public crypto ratings. These ratings judge cryptocurrency on criteria such as fundamental technology, innovation, and applicability.
The genesis of bitcoin was rooted in the desire to have a currency free from government and central banks. Unfortunately, scams and fraud have invaded the cryptocurrency market and consumers are demanding government intervention. Cryptocurrency investors will have to accept the caveat emptor mindset until consumer protections are established.
- Cryptocurrencies are not backed by a government or central bank.
- Cryptocurrencies stored online are not insured against loss.
- A cryptocurrency’s value can change quickly and dramatically.
- Nothing about cryptocurrencies makes them a foolproof investment.
- Although governments around the world are working to create a regulatory framework, there is currently very little in the way of consumer protection in the crypto space.
As always, please do your own due diligence, believe only half of what you read and scrutinize the source of the information. And NEVER invest more than you can stand to lose.
This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.