When it comes to cryptocurrencies, consumers have many unanswered questions. What is cryptocurrency? How do you use digital money? Are cryptocurrencies safe to use?
Instead of a tangible piece of currency you can carry with you, cryptocurrency is completely digital and does not have a physical form. A common type of cryptocurrency that consumers may be aware of is Bitcoin.
As the popularity of cryptocurrencies rises, it is important for consumers to educate themselves on how cryptocurrencies work and the risks associated with using them. The resources and information below will help you gain a better understanding of Cryptocurrency and assist consumers in making informed financial decisions.
Cryptocurrency (also referred to as virtual currency and digital currency) - a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In simple terms, cryptocurrency is electronic money that is not issued or backed by a government or central bank. Units of cryptocurrency are often referred to as “cryptocoin”.
Bitcoin - the most popular cryptocurrency on the virtual currency market. Bitcoins have an equivalent value in other currencies, such as the U.S. Dollar, and can be exchanged for U.S. dollars.
Alt-coin - Any cryptocurrency alternative to Bitcoin.
Initial Coin Offerings (ICOs) - Similar in theory to an Initial Public Offering (IPO) of a stock, an ICO occurs when a new cryptocoin is created and goes on sale to the public.
Public Key - A published key, or an encrypted sequence of 64 letters and numbers, that can be used to send a secure message (or cryptocurrency) to a receiver. The public and private key are both needed to unlock or transfer the cryptocurrency from one user to another.
Private Key - A secret key, or sequence of 64 letters and numbers, that is used to decrypt messages encrypted by a public key. The public and private key are both needed to unlock or transfer the cryptocurrency from one user to another.
Cryptocurrency Wallet (also referred to as a digital wallet) - a software program that stores private and public cryptocurrency keys. Cryptocurrency wallets also enable users to send and receive virtual currency.
Blockchain - An online ledger containing records of every cryptocurrency transaction. The blockchain is public and decentralized, and is maintained by a peer-to-peer network of computers.
What is cryptocurrency?
Cryptocurrency is electronic money that is not backed by any government or central bank. Cryptocurrency, also referred to as virtual currency or digital currency, is completely digital and does not have a physical form. Bitcoin is the most common form of cryptocurrency that consumers may be aware of.
If cryptocurrencies do not have any physical form, what proof do I have that I purchased any?
Instead of tangible forms of currency, like a dollar bill or coins, cryptocurrency is composed of a public key and a private key. Each of these keys are a 64-alphanumeric code that, when combined, represent an amount of cryptocurrency. The public key is listed on purchase transactions, or blockchains, and the private key is stored in a cryptocurrency wallet and should be kept secret.
If I lose my private keys to my cryptocurrency, can I be reimbursed?
If you lose your private keys, you have lost all access to your funds. There are no companies or government agencies that can reimburse you. If you store your private keys yourself, it is recommended that you keep backup copies on a USB drive, external hard drive or even on paper.
Why do people purchase cryptocurrency?
People purchase cryptocurrency for various reasons. Some benefits of cryptocurrency include:
Immediate payment - Cryptocurrency transactions move funds from one person to another instantly. There are no third-party approvals or delays that can occur in traditional asset transfers through banks or brokerage agents.
Lower or Non-existent Fees - There are usually no transaction fees for cryptocurrency exchanges because all transactions are completed through peer to peer computer systems. External agencies are not required to make a transfer which reduces transaction fees.
Easier International Trade - While cryptocurrencies are largely unrecognized as legal tender on national levels, companies of all sizes across the world are doing business with cryptocurrency. Cryptocurrencies are currently not subject to the exchange rates, interest rates, or other levies imposed by a specific country. This saves businesses and individuals time and money when transferring money from one country to another.
Individual Ownership - In traditional financial systems, funds are given to a third party like a bank or credit union for secure handling. This process usually includes a Terms of Service policy and fees. With cryptocurrency, the consumer is the sole owner of the encryption keys and maintains the funds themselves. While there are risks to having sole ownership of your funds, many users enjoy the ability to eliminate the involvement of a third party in their finances.
Identity Theft Protection - When using credit or debit cards, even for a small amount, access to your full credit line is given to the merchant during the transaction. Credit cards operate on a “pull” basis, where the store initiates the payment and pulls the designated amount from your account. Cryptocurrency uses a “push” process that allows the cryptocurrency holder to send an exact amount to the recipient with no further information. Be aware that while cryptocurrency may have less risk of identity theft, there are still scams and theft that can occur.
Investments - Similar to stocks on the stock market, many people purchase cryptocurrency for the investment prospect, anticipating that the value of the cryptocurrency will rise and eventually be worth more than the purchase price.
Do cryptocurrencies have status as legal tender?
No party is required by law to accept cryptocurrency as payment. While the number of stores and online retailers that accept virtual currencies as payment is increasing, cryptocurrencies are not as widely accepted as traditional currencies.
Are cryptocurrencies taxable?
The Internal Revenue Service currently views cryptocurrencies as assets, not currency. If you spend or sell your virtual currency, you must keep track of your taxable gains, and possibly your losses, to report them on your tax filings. The Internal Revenue Service has issued important guidance relating to virtual currencies, which you can access at https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies.
Are cryptocurrency transactions anonymous?
No, cryptocurrency transactions are not anonymous. While you may not have to provide your name or address for a cryptocurrency transaction, information about every cryptocurrency transaction is publicly shared and stored forever. It is possible for hackers to use your cryptocurrency transaction information to discover your IP address and estimate both your location and how much cryptocurrency you own.
Does the government insure cryptocurrency accounts?
No. The Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund protects consumers if certain banks or credit unions fail. However, this does not apply to cryptocurrency accounts. If a cryptocurrency exchange or wallet company fails, the government will not cover your losses.
What are the risks in buying cryptocurrency?
There are several risks associated with cryptocurrencies that consumers should be aware of before purchasing.
Hackers - Owning cryptocurrency puts you at greater risk of being targeted by hackers. Hackers have been able to breach advanced security systems to access personal information based on public cryptocurrency records. For example, hackers may be able to find IP addresses, or physical computer locations, associated with cryptocurrency transactions. Any computer that stores private keys is a target for hackers.
Fewer Legal Protections - If you trust a company or another person to hold your cryptocurrency and something goes wrong, the company may not offer you the same protections and assistance you receive from banks and other government-backed financial institutions.
Cost - Since the rate of cryptocurrency is unpredictable, consumers may end up spending more using cryptocurrency than regular cash or credit cards.
Scams - Scammers have started taking advantage of consumers in the cryptocurrency market by creating fake opportunities. Many of these scams encourage consumers to invest in a brand-new cryptocurrency coin through an Initial Coin Offering and consumers find out later that the cryptocurrency coin does not really exist. The U.S. Securities and Exchange Commission created an example website, Howeycoins, to show how easy it is to impersonate a cryptocurrency exchange.
Who can I contact if I encounter a problem with cryptocurrency or a cryptocurrency exchange company?
Consumers can submit complaints to the Consumer Financial Protection Bureau at www.consumerfinance.gov/complaint.
Additional Cryptocurrency Resources
- Consumer Financial Protection Bureau – Report financial product or service complaints at www.consumerfinance.gov/complaint.
- Consumer Financial Protection Bureau’s Consumer Advisory on Cryptocurrency – Provides information on risks associated with virtual currencies and shares consumer tips and information
- U.S. Commodities Futures Trading Commission – Bitcoin and other virtual currency information and resources www.cftc.gov/bitcoin
- U.S. Securities and Exchange Commission – Information and resources for individual investors regarding cryptocurrency https://www.investor.gov/howeycoins
- North American Securities Administrators Association – Investor Advisory on initial coin offerings (ICOs) http://www.nasaa.org/44836/informed-investor-advisory-initial-coin-offerings/