Virtual Currency, Cryptocurrency, and Digital Assets Information for Consumers

Date Posted: June 23, 2023
Earlier Versions: May 15, 2014 and March 11, 2014

DFI is revising its guidance, which was issued approximately nine years ago. Although the virtual currency and digital asset space has matured, many of the same risks remain. This guidance is meant to combine information previously issued by DFI and guidance issued by the Federal Trade Commission¹ and the North American Securities Administrators Association² . For purposes of this guidance, references to “virtual currency” is synonymous with “cryptocurrency.”

Volatility is one of the major risks of holding virtual currencies. The value of a virtual currency can change rapidly, even changing by the hour. Virtual currencies tend to be more volatile than more traditional investments, such as stocks and bonds, making them unsuitable for investors seeking long-term savings or for retirement goals. An investment that’s worth thousands of dollars today may be worthless tomorrow. If a virtual currency’s value goes down, there is no guarantee it will go up again. Anyone holding virtual currencies should be aware that they may lose a significant part of their investment as the market changes. Never invest more than you can afford to lose and maintain a diversified investment portfolio to help weather the market ups and downs.

Virtual currency is not insured by a government like U.S. dollars deposited into an FDIC-insured bank account. If something happens to your account or virtual currency funds, the government has no obligation to step in and help get your money back. Once the funds are gone, there is no way to retrieve them and make you whole.

Due to the volatile nature of the virtual currency space, it is possible your virtual currency or U.S. dollars will not be withdrawn according to your expectations.

Several virtual currency platforms have filed for bankruptcy causing consumers to lose their funds or be locked out of accessing their funds for a considerable period of time. Furthermore, if you hold a virtual currency account on a platform that goes into bankruptcy, the court may consider you an unsecured creditor, which means that you may not be able to withdraw your virtual currency or receive the full value of your virtual currency.

Many virtual currency proponents have stated that virtual currency is a pathway for the underbanked and unbanked to access financial services. This has not typically been the case, as bank accounts are generally required before accessing virtual currency platforms. Furthermore, virtual currency platforms do not necessarily provide the same protections as federally-insured accounts, such as a FDIC-insured bank account or NCUA-insured credit union account. If you need funds to pay bills or meet other financial obligations, a virtual currency account may not provide access to funds on the dates needed or the funds could be lost forever.

According to Pew Research, Asian, Black, and Hispanic adults are more likely than White adults to invest in, trade, or use cryptocurrency. ³ Furthermore, numerous athletes and other celebrities have promoted virtual currency brands to BIPOC communities as a safe and lucrative investment for building wealth. Some of these individuals are now facing civil lawsuits or charges by the U.S. Securities and Exchange Commission (SEC). Investing in virtual currency is risky and has not proven to be a safe and reliable means to build and preserve wealth.

Purchasers of virtual currencies rely on the strength of their own computer systems as well as systems provided by third parties to protect purchased virtual currencies from theft. Some exchanges that offer to store the consumer’s virtual currencies in virtual wallets have been unable to protect them. There are a number of instances where consumers have lost all their funds because their wallets have been hacked. Creating a digital wallet to store virtual currency involves installing software on a purchaser’s computer. As with any software download, hackers may include malicious code.

Virtual currency or crypto-related investments only exist on the internet. Issuers can be located anywhere in the world, so it may be impossible to trace and recover lost funds through the courts.

Payments made in virtual currency typically have fewer safeguards. Credit cards and debit cards have legal protections if something goes wrong. For example, if you need to dispute a purchase, your credit card company has a process to help you get your money back. Virtual currencies typically do not come with any such protections. Once you pay with virtual currency, you can usually only get your money back if the person you paid sends it back. Before you buy something with virtual currency, know the seller’s reputation by doing some research before you pay.

People talk about virtual currency transactions as anonymous. But the truth is virtual currency transactions will be recorded on a public ledger called a “blockchain.” Depending on the blockchain, the information added to the blockchain can include details like the transaction amount, as well as the sender’s and recipient’s wallet addresses. It is sometimes possible to use transaction and wallet information to identify the people involved in a specific transaction.

Verify whether a company is licensed and regulated in the State of Washington. Unregulated exchanges may lack appropriate internal controls, making them susceptible to fraud, theft, and hacking. Check the terms and conditions of the account agreement to make sure you understand your rights under the terms of the agreement. This may mean scrolling through many pages of “fine print” or requesting additional information directly from the company to fully understand the risks.

Because virtual currencies provide some anonymity, criminals have found virtual currency useful for money laundering, ransomware, and other crimes.

Virtual currency is treated as property and transactions are therefore taxable by the U.S. Government. Refer to the IRS website for more information.

Scammers will use urgency to get you to act. If you receive an unsolicited call, email, or text requiring you to act immediately (such as transfer funds or provide account information), call or personally visit your financial institution to verify. Take a moment to assess whether the urgent request is legitimate.

Scammers will pretend to be a legitimate business, such as a lender, and will ask you to send bitcoin or ask for your online credentials. Make sure that you are dealing with a licensed and regulated financial institution before providing any banking information to a third party.

Scammers are spoofing websites and using fake social media accounts to obscure their identities. Investors should always take steps to identify phony accounts by looking closely at content, analyzing dates of inception and considering the quality of engagement. To ensure investors do not accidently deal with an imposter firm, pay careful attention to domain names and learn more about how to protect your online accounts.

Scammers often reference or publish positive, yet bogus testimonials purportedly drafted by satisfied customers. These testimonials create the appearance the promoter is reliable – they have already earned significant profits in the past, and new investors can reap the same financial benefits as prior investors. In many cases, though, the reviews are drafted not by a satisfied customer but by the scammer.

Bad actors often entice new investors by promising the payment of safe, lucrative, guaranteed returns over relatively short terms – sometimes measured in hours or days instead of months or years. These representations are often a red flag for fraud, as all investments carry some degree of risk, and the potential profits are typically correlated with the degree of risk. Learn more about the warning signs of investment fraud.

No legitimate business is going to demand you send virtual currency in advance – not to buy something, and not to protect your money. That’s always a scam.

Don’t trust people who promise you can quickly and easily make money in the virtual currency markets.

If you meet someone on a dating site or app, and they want to show you how to invest in virtual currency, or ask you to send them virtual currency, that’s a scam.