By Peter Schroeder - 05/07/14 12:42 PM EDT
The Securities and Exchange Commission (SEC) on Wednesday warned investors to be wary of the virtual currency bitcoin.
The financial regulator cautioned that bitcoin has historically been volatile, subject to hackers, and a potential target for fraudulent schemes.
For example, since bitcoin transactions are not backed by any government or routed through traditional financial institutions, it could be difficult to trace money should something go awry, the SEC said.
The SEC also said that since some early bitcoin investors have enjoyed a windfall as the virtual currency gained value compared to dollars, they could be ripe targets for people peddling fraudulent or high-risk schemes. Promoters could also lean on the personal interest many bitcoin investors have in the success of the currency to get them to invest poorly.
Bitcoin has become the most widely known virtual currency, but its stability has come into question. In February, the largest bitcoin exchange, Mt. Gox, was forced to declare bankruptcy after hackers stole hundreds of millions of dollars’ worth of bitcoin.
The SEC cautioned that federal, state, and local governments are still sorting out exactly how to treat bitcoin, so future restrictions on its use are not yet known to investors.
In March, the IRS took the first step towards taxing bitcoins, clarifying that the government views them as property, and not currency.
The SEC had previously aired warnings about bitcoins in the context of Ponzi schemes, but broadened the risks for potential investors with the new alert.