ASSISTANT AG CALDWELL'S REMARKS ON DIGITAL CURRENCIES LIKE BITCOM

FROM:  U.S. JUSTICE DEPARTMENT
Assistant Attorney General Leslie R. Caldwell Delivers Remarks at the ABA’s National Institute on Bitcoin and Other Digital Currencies
Washington, DC United States ~ Friday, June 26, 2015
Thank you Nina [Marino] for that kind introduction.

It is a pleasure to address today’s ABA National Institute on Bitcoin and Other Digital Currencies.  As head of the Justice Department’s Criminal Division, I am privileged to lead over 600 attorneys who investigate and prosecute federal crime, help develop criminal law and formulate law enforcement policy.  Our talented prosecutors perform crucial work in many of the areas relevant to today’s discussion, including the fight to combat money laundering, financial fraud, child exploitation and cybercrime.

This afternoon, I’d like to discuss the department’s approach to the emerging virtual currency landscape, our ongoing efforts to prosecute those who commit crimes by using virtual currency, and our view that compliance and cooperation from exchanges, companies and other market actors can ensure that emerging technologies are not misused to fund and facilitate illicit activities.

The department is aware of the many legitimate actual and potential uses of virtual currency.  It has the potential to promote a more efficient online marketplace.  It also potentially can lower costs for brick and mortar businesses, by removing the need to pay credit card-related costs.  And in theory, it can help speed and reduce the cost of cross-border transactions.  But we also have seen that criminals have been among the first to enthusiastically embrace the use of virtual currency, primarily in crime involving the internet.

Many of the inherent features of virtual currencies are exactly what makes them attractive to criminals.  Many criminals like virtual currency systems because these systems conduct transfers quickly, securely and with a perceived level of anonymity.  For others, the irreversibility of payments made in virtual currency and lack of oversight by a central financial authority is appealing.  Finally, the ability to conduct international peer-to-peer transactions that lack immediately available personally identifying information has made decentralized virtual currency attractive to those who wish to cover their money trail.

As a result, virtual currency facilitates a wide range of traditional criminal activities as well as sophisticated cybercrime schemes.

Much of the illicit conduct involving virtual currency occurs through online black markets such as the now-shuttered Silk Road, which operated on an anonymized “dark web” network that masked users’ physical locations, making them difficult to track.  Similar online black markets continue to operate, offering on a global scale, a wide selection of illicit goods and services.  While these have included more traditional crimes such as narcotics trafficking, stolen credit card information, and hit-men for hire, we have also seen a significant evolution in criminal activity.

For example, Bitcoin has been utilized to fund the production of child exploitation material through online crowd-sourcing – a development rarely seen before the prevalence of virtual currency.  It has also been used to buy and sell lethal toxins over the internet and as a payment method for virtual kidnapping and extortion, allowing near-instantaneous transactions across the globe between perpetrators of phishing and hacking schemes and their victims.

Despite the significant challenges in investigating, much less prosecuting, this activity, the department already has a strong record of bringing cases in which virtual currencies were used to facilitate criminal conduct.  While the burgeoning assortment of online exchanges, virtual currencies and virtual marketplaces has created a complex and evolving environment or “ecosystem” as this audience knows it, we too are keeping pace and will pursue those who exploit vulnerabilities in that ecosystem for illegal gain.

In this arena, we rely principally on money services business, money transmission and anti-money laundering statutes.  While individual users who are not acting as exchangers or transmitters are not required to register with FinCEN, many virtual currency systems, exchangers and related services are.  Additionally, most states also require money transmitters to obtain a state license in order to conduct business in that state, and some like New York have established virtual-currency specific licensing requirements.  Any failure to register or obtain a license may subject a money transmitter to criminal prosecution, and a money transmitter that knowingly moves funds connected to a criminal offense also faces prosecution for money laundering, regardless of licensing status.  Whether the currency involved is virtual or traditional, the department enforces these critical laws to prosecute money services businesses that engage in money laundering or facilitate crime by flouting registration and licensing requirements.

The department’s enforcement actions have evolved along with the virtual currency ecosystem.  Our first major action against a virtual currency service used for illicit purposes was in 2007, when the Criminal Division’s Asset Forfeiture and Money Laundering Section (AFMLS), together with our Computer Crime and Intellectual Property Section (CCIPS), spearheaded the prosecution against e-Gold and its owners on charges related to money laundering and operating an unlicensed money transmitting business.  E-Gold was a popular online currency exchange, and was a favored hub for cybercriminals in part because of the lack of account holder identity verification.  An e-mail address was the only information needed to set up an account, allowing global anonymous transactions.  After a multi-agency investigation, e-Gold and three associated individuals pleaded guilty in 2008 to charges of money laundering and operating an unlicensed money transmitting business.

In the wake of e-Gold’s demise, the virtual currency system Liberty Reserve was created.  As alleged in our pending indictment, Liberty Reserve was structured and operated to help users conduct illegal transactions anonymously and launder the proceeds of their crimes.

Liberty Reserve quickly became one of the principal money transfer agents used by cybercriminals around the world to distribute, store and launder the proceeds of their illegal activity.  Like e-Gold, any would-be account holder needed little more than a working email address to move funds around the globe.  Again, this virtual currency platform became a favorite of cybercriminals and other tech-savvy wrongdoers, enabling them to engage in anonymous financial transactions, all conducted in violation of BSA requirements.

Before the government shut down Liberty Reserve in 2013, it had accumulated more than one million users worldwide, including more than 200,000 in the United States, who conducted approximately 55 million transactions through its system totaling more than $6 billion in funds.  These funds included suspected proceeds of credit card fraud, identity theft, investment fraud, computer hacking, child pornography, narcotics trafficking and other crimes.

In a case jointly spearheaded by AFMLS and prosecutors from the Southern District of New York, several of Liberty Reserve’s top executives, including a co-founder of the company, the IT Manager and its Chief Technology Officer, have pleaded guilty to money laundering and operating an unlicensed money transmitting business and have been sentenced up to five years in prison.  The creator of Liberty Reserve was extradited to the United States from Spain in October 2014 and is currently awaiting trial, where he is, of course, presumed innocent.

The department has also taken action against a number of individuals and groups who sought to exploit decentralized systems such as Bitcoin and anonymized dark web servers to finance illicit trade and activity in online black markets.

The first major prosecution of a dark market website was by the Southern District of New York in a case against Ross Ulbricht, aka “Dread Pirate Roberts,” who was arrested in October 2013 and convicted by a jury for his role in creating and operating Silk Road, an online black market whose payment operations exclusively used Bitcoin.

Silk Road – designed to act as a black-market bazaar completely free from government regulation and oversight – attempted to enable its users to exchange illegal drugs and other unlawful goods and services anonymously and beyond the reach of law enforcement.  It emerged as one of the most extensive criminal marketplaces on the internet.  Before it was dismantled by law enforcement, Silk Road was used by thousands of drug dealers and other vendors to distribute hundreds of kilograms of illegal drugs and other unlawful goods and services to well over a 100,000 buyers, and has been linked to at least six overdose deaths around the world.  Further, Silk Road was also used to launder hundreds of millions of dollars derived from these unlawful transactions.  And just a few weeks ago, in a federal courtroom in New York City, Ulbricht was sentenced to a term of life in prison – a cautionary tale for all those who would use dark spaces on the internet to flout the law.

The Silk Road story, however, did not end with Ross Ulbricht.  Two federal agents, sworn to uphold the law, were also apparently lured by the perceived anonymity of virtual currency.  

Carl Force, a Special Agent with the Drug Enforcement Administration, and Shaun Bridges, a Special Agent with the U.S. Secret Service, were both assigned to the Baltimore Silk Road Task Force, which investigated illegal activity in the Silk Road marketplace.

Force served as an undercover agent.  According to court documents, Force went rogue and developed additional online personas to engage in complex bitcoin transactions to steal hundreds of thousands of dollars from the government and from the targets of the investigation.  Independently, Bridges also allegedly engaged in an even larger direct theft, illegally diverting over $800,000 in virtual currency to his personal account.

Both individuals have been charged by the Criminal Division’s Public Integrity Section and prosecutors from the Northern District of California with wire fraud, theft of government property and money laundering.  These investigations and prosecutions should send a strong message to those who would exploit technology to commit crimes: no matter how anonymous people might feel using virtual currency, their actions are not untraceable.  People should not assume that law enforcement will not notice when they act on the dark web, or that we are not keeping up with emerging technology.  Our successful prosecutions have shown that neither the supposed anonymity of the dark web nor the use of virtual currency is an effective shield from arrest and prosecution.

In addition to the operators of Silk Road and the drug traffickers who conducted their deals online in bitcoin, prosecutors from the Southern District of New York have also taken action against those who enabled this activity through the operation of Bitcoin currency exchanges.  We understand that there are legitimate exchanges, and many of those are working closely with FinCEN and other regulators to ensure compliance with the law.  But there are also many exchanges that don’t concern themselves with following the law.

From approximately December 2011 to October 2013, Robert Faiella ran an underground Bitcoin exchange on the Silk Road website under the alias “BTCKing,” and sold bitcoin to users to fund their purchases on the site.

Faiella would run bitcoin orders through Charlie Shrem, who operated a New York-based company that acted as a bitcoin to fiat currency exchange.  Although Shrem was the company’s Anti-Money Laundering Officer and had registered the company with FinCEN as a money services business, Shrem failed to report any of BTCKing’s activity, despite knowing it was being used for illegal purchases.  Shrem’s assistance enabled BTCKing to finance Silk Road transactions without collecting any personal identifying information from customers.  Faiella pleaded guilty to operating an unlicensed money transmitting business involving funds he knew were intended to support unlawful activity, and Shrem pleaded guilty to aiding and abetting Faiella’s operations.  Just this past winter, they were sentenced to four and two years in prison, respectively.

While these cases demonstrate that the criminal use of virtual currency has grown rapidly in recent years, its comparative scale versus traditional money laundering still pales in magnitude.  Few virtual systems currently can accommodate the hundreds of millions of dollars we have seen in certain large-scale money laundering schemes involving government-issued currency.  That said, as virtual currencies become more mature and better understood by criminals, we expect to see an increase in both individualized criminal activity and large-scale money laundering enterprises.

In some ways, companies and individuals operating in the virtual currency ecosystem are at a crossroads, and they have an opportunity to help virtual currency emerge from its association with criminal activities.  While there obviously are good and legitimate reasons to use these currencies, industry participants are now on notice that criminals too, make regular use of them.  So, to ensure the integrity of this ecosystem and prevent its penetration by crime, the industry must raise the level of its game on the compliance front.

That includes strict compliance with money services business regulations and anti-money laundering statutes.  I understand that you have heard from our partners at FinCEN this morning about our collaborative efforts to investigate and enforce anti-money laundering laws, and you’ll also hear more from Katie Haun this afternoon about the investigation of the virtual currency business Ripple Labs, which operated an unlicensed money transmitting business.

Ripple sold a virtual currency called “XRP,” but failed for a time to register with FinCEN as a money service business and failed to establish and maintain appropriate anti-money laundering protections.  Importantly, the department resolved this investigation after Ripple agreed to a number of substantial remedial measures.  This includes cooperation in other ongoing investigations, a change in business model and oversight by independent auditors, an extensive look-back through their previous activities and development of an extensive compliance framework.

The resolution with Ripple Labs underscores the importance of having a strong compliance program to ensure adherence to the law.  Virtual currency exchangers and other marketplace actors comprise the front line of defense against money laundering and other financial crime.  Robust compliance programs, such as those imposed on Ripple Labs, are essential to keeping crime out of our financial system.  If a money services business finds itself subject to a criminal investigation, we will look, as we do in all cases involving potential prosecution of a business entity, at the factors set forth in the Principles of Prosecution of Business Organizations, or Filip Factors.  Two of the Filip Factors in particular, the existence of an effective and well-designed compliance program and a company’s remedial actions, including steps to improve upon an existing compliance regime, are explicitly set forth as factors prosecutors should consider.

As you know, there is no “one-size-fits-all” compliance program.  Rather, effective anti-money laundering and other compliance programs must be tailored to meet the circumstances, size, structure and risks encountered by each entity.  And virtual currencies, with their perceived anonymity, pose compliance risks that money transmitters such as Western Union do not face. Industry participants must address those risks, even when it may be costly to do so.

Just as in any other corporate investigation, when reviewing the conduct of, for example, an exchange, the department will examine whether a company has meaningfully addressed compliance.  We have resolved cases against many financial institutions and other entities, and are deeply familiar with hallmarks of a genuine compliance program.

We expect virtual currency businesses to take compliance risk as seriously as they take any other business risk.  Now, we recognize that new entrants in emerging fields may find that compliance requires a significant expenditure of resources, and we will be context-specific in analyzing appropriate compliance frameworks including consideration of the size and scope of the business.  But a real commitment to compliance is a must, particularly given the significant risks in the virtual currency market.  In the long run, investment in effective compliance programs will be well worth it, especially in the event that a company has to interact with law enforcement.

In many ways, I think that is a message that everybody gathered here today can appreciate.  As the virtual currency markets attempt to move past their association with the Silk Roads and Liberty Reserves of the online world, are used to finance legitimate activity, and are becoming increasingly subject to regulation, robust compliance with existing anti-money laundering laws and regulations is necessary – indeed, critical – to bolster the reliability and value of virtual currency.

The challenges posed by the cases I’ve described are not unique to the virtual currency world.  Indeed, these dark web criminals are merely using new tools to conduct the same old crimes, committing what is essentially street crime like drug trafficking and extortion, but over computer networks.

For those investors, exchanges and compliance officers who deal in virtual currency, compliance is of paramount importance.  Adherence to regulations and state license requirements can reduce the liability of corporations who invest or deal in virtual currency.  As seen with Ripple Labs, compliance and remediation can lead to a more favorable resolution of criminal investigations and adhering to anti-money laundering guidelines allows the legitimate use of virtual currency to grow and be responsive to infiltration and abuse by criminal elements.  While the department will aggressively investigate and prosecute criminal activity that is funded through virtual currency, money services businesses that fall under the department’s scrutiny can also receive credit for meaningful and sincere compliance efforts.

 Your compliance and cooperation will make it more difficult for those who seek to operate illicit and underground marketplaces and will be a key element for law enforcement to shed light on these illegal virtual currency transactions.  It also will help to ensure the continued viability of virtual currency systems in the future.

Thank you for the opportunity to address this year’s National Institute on Bitcoin and Other Virtual Currencies.

BITCOM-RELATED WEBSITE OWNER CHARGED BY SEC WITH OFFERING UNREGISTERED SECURITIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the co-owner of two Bitcoin-related websites for publicly offering shares in the two ventures without registering them.

An SEC investigation found that Erik T. Voorhees published prospectuses on the Internet and actively solicited investors to buy shares in SatoshiDICE and FeedZeBirds.  But he failed to register the offerings with the SEC as required under the federal securities laws.  Investors paid for their shares using Bitcoin, a virtual currency that can be used to purchase real-world goods and services and exchanged for fiat currencies on certain online exchanges.  The profits ultimately earned by Voorhees through the unregistered offerings totaled more than $15,000.

Voorhees agreed to settle the SEC’s charges by paying full disgorgement of the $15,843.98 in profits plus a $35,000 penalty for a total of more than $50,000.

“All issuers selling securities to the public must comply with the registration provisions of the securities laws, including issuers who seek to raise funds using Bitcoin,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “We will continue to focus on enforcing our rules and regulations as they apply to digital currencies.”

According to the SEC’s order instituting a settled administrative proceeding, the first unregistered offering occurred in May 2012 as 2,600 bitcoins were raised through the sale of 30,000 shares in FeedZeBirds, which promises to pay bitcoins to Twitter users who forward its sponsored text messages.  Then in two separate offerings from August 2012 to February 2013, SatoshiDICE sold 13 million shares and raised 50,600 bitcoins that were worth approximately $722,659 at the time.  SatoshiDICE, which calls itself the biggest Bitcoin-betting game in the world and pays out casino-like winnings in bitcoins, ultimately returned these offering proceeds to investors in a buy-back transaction in July 2013.  A significant rise in the exchange rate of U.S. dollars to bitcoins actually increased the amount paid back to investors to approximately $3.8 million for 45,500 bitcoins.

The SEC’s order finds that Voorhees actively solicited investors to buy FeedZeBirds and SatoshiDICE shares on a website dedicated to Bitcoin known as the Bitcoin Forum.  Voorhees also publicly promoted the unregistered offerings on other Bitcoin-related websites as well as Facebook.  The first unregistered offering was explicitly referred to as the “FeedZeBirds IPO.”  Despite these general solicitations, no registration statement was filed for the FeedZeBirds or SatoshiDICE offerings, and no exemption from registration was applicable to these transactions.

The SEC’s order finds that Voorhees violated Sections 5(a) and 5(c) of the Securities Act of 1933.  Voorhees consented to cease and desist from committing or causing any future violations of the registration provisions without admitting or denying the SEC’s findings.  In addition to the monetary sanctions, Voorhees agreed that he will not participate in any issuance of any security in an unregistered transaction in exchange for any virtual currency including Bitcoin for a period of five years.  The entry of the SEC’s order disqualifies Voorhees from relying on Rule 506(b) and 506(c) of Regulation D under the Securities Act, as defined in the bad actor disqualification provisions of Rule 506.

The SEC’s investigation was conducted by Daphna A. Waxman, Daphne P. Downes, and Philip R. Moustakis of the New York Regional Office.  The case was supervised by Valerie A. Szczepanik and Amelia A. Cottrell.

SEC WARNS OF SCAMS INVOLVING VIRTUAL CURRENCY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to make investors aware about the potential risks of investments involving Bitcoin and other forms of virtual currency.

The rise of Bitcoin and other virtual and digital currencies creates new concerns for investors. A new product, technology, or innovation – such as Bitcoin – has the potential to give rise both to frauds and high-risk investment opportunities. Potential investors can be easily enticed with the promise of high returns in a new investment space and also may be less skeptical when assessing something novel, new and cutting-edge.

We previously issued an Investor Alert about the use of Bitcoin in the context of a Ponzi scheme. The Financial Industry Regulatory Authority (FINRA) also recently issued an Investor Alert cautioning investors about the risks of buying and using digital currency such as Bitcoin. In addition, the North American Securities Administrators Association (NASAA) included digital currency on its list of the top 10 threats to investors for 2013.

What is Bitcoin?

Bitcoin has been described as a decentralized, peer-to-peer virtual currency that is used like money – it can be exchanged for traditional currencies such as the U.S. dollar, or used to purchase goods or services, usually online. Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government.

IRS treats Bitcoin as property. The IRS recently issued guidance stating that it will treat virtual currencies, such as Bitcoin, as property for federal tax purposes. As a result, general tax principles that apply to property transactions apply to transactions using virtual currency

If you are thinking about investing in a Bitcoin-related opportunity, here are some things you should consider.

Investments involving Bitcoin may have a heightened risk of fraud.

Innovations and new technologies are often used by fraudsters to perpetrate fraudulent investment schemes. Fraudsters may entice investors by touting a Bitcoin investment “opportunity” as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors may find these investment pitches hard to resist.

Bitcoin Ponzi scheme. In July 2013, the SEC charged an individual for an alleged Bitcoin-related Ponzi scheme in SEC v. Shavers. The defendant advertised a Bitcoin “investment opportunity” in an online Bitcoin forum, promising investors up to 7% interest per week and that the invested funds would be used for Bitcoin activities. Instead, the defendant allegedly used bitcoins from new investors to pay existing investors and to pay his personal expenses.

As with any investment, be careful if you spot any of these potential warning signs of investment fraud:

“Guaranteed” high investment returns. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.

Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication – meaning you didn’t ask for it and don’t know the sender – about an investment opportunity.

Unlicensed sellers. Federal and state securities laws require investment professionals and their firms who offer and sell investments to be licensed or registered. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. Check license and registration status by searching the SEC’s Investment Adviser Public Disclosure (IAPD) website or FINRA’s BrokerCheck website.

No net worth or income requirements. The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Most registration exemptions require that investors are accredited investors. Be highly suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income.
Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk.

Pressure to buy RIGHT NOW. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.

Bitcoin users may be targets for fraudulent or high-risk investment schemes.

Both fraudsters and promoters of high-risk investment schemes may target Bitcoin users. The exchange rate of U.S. dollars to bitcoins has fluctuated dramatically since the first bitcoins were created. As the exchange rate of Bitcoin is significantly higher today, many early adopters of Bitcoin may have experienced an unexpected increase in wealth, making them attractive targets for fraudsters as well as promoters of high-risk investment opportunities.

Fraudsters target any group they think they can convince to trust them. Scam artists may take advantage of Bitcoin users’ vested interest in the success of Bitcoin to lure these users into Bitcoin-related investment schemes. The fraudsters may be (or pretend to be) Bitcoin users themselves. Similarly, promoters may find Bitcoin users to be a receptive audience for legitimate but high-risk investment opportunities. Fraudsters and promoters may solicit investors through forums and online sites frequented by members of the Bitcoin community.    

Bitcoins for oil and gas. The Texas Securities Commissioner recently entered an emergency cease and desist order against a Texas oil and gas exploration company, which claims it is the first company in the industry to accept bitcoins from investors, for intentionally failing to disclose material facts to investors including “the nature of the risks associated with the use of Bitcoin to purchase working interests” in wells. The company advertised working interests in wells in West Texas, both at a recent Bitcoin conference and through social media and a web page, according to the emergency order.


Bitcoin trading suspension. In February 2014, the SEC suspended trading in the securities of Imogo Mobile Technologies because of questions about the accuracy and adequacy of publicly disseminated information about the company’s business, revenue and assets. Shortly before the suspension, the company announced that it was developing a mobile Bitcoin platform, which resulted in significant movement in the trading price of the company’s securities.

Using Bitcoin may limit your recovery in the event of fraud or theft.

If fraud or theft results in you or your investment losing bitcoins, you may have limited recovery options. Third-party wallet services, payment processors and Bitcoin exchanges that play important roles in the use of bitcoins may be unregulated or operating unlawfully.

Law enforcement officials may face particular challenges when investigating the illicit use of virtual currency. Such challenges may impact SEC investigations involving Bitcoin:

Tracing money. Traditional financial institutions (such as banks) often are not involved with Bitcoin transactions, making it more difficult to follow the flow of money.

International scope. Bitcoin transactions and users span the globe. Although the SEC regularly obtains information from abroad (such as through cross-border agreements), there may be restrictions on how the SEC can use the information and it may take more time to get the information. In some cases, the SEC may be unable to obtain information located overseas.

No central authority. As there is no central authority that collects Bitcoin user information, the SEC generally must rely on other sources, such as Bitcoin exchanges or users, for this type of information.

Seizing or freezing bitcoins. Law enforcement officials may have difficulty seizing or freezing illicit proceeds held in bitcoins. Bitcoin wallets are encrypted and unlike money held in a bank or brokerage account, bitcoins may not be held by a third-party custodian.

Investments involving Bitcoin present unique risks.

Consider these risks when evaluating investments involving Bitcoin:

Not insured. While securities accounts at U.S. brokerage firms are often insured by the Securities Investor Protection Corporation (SIPC) and bank accounts at U.S. banks are often insured by the Federal Deposit Insurance Corporation (FDIC), bitcoins held in a digital wallet or Bitcoin exchange currently do not have similar protections.

History of volatility. The exchange rate of Bitcoin historically has been very volatile and the exchange rate of Bitcoin could drastically decline. For example, the exchange rate of Bitcoin has dropped more than 50% in a single day. Bitcoin-related investments may be affected by such volatility.
Government regulation. Bitcoins are not legal tender. Federal, state or foreign governments may restrict the use and exchange of Bitcoin.

Security concerns. Bitcoin exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. Bitcoins also may be stolen by hackers.

New and developing. As a recent invention, Bitcoin does not have an established track record of credibility and trust. Bitcoin and other virtual currencies are evolving.

Recent Bitcoin exchange failure. A Bitcoin exchange in Japan called Mt. Gox recently failed after hackers apparently stole bitcoins worth hundreds of millions of dollars from the exchange. Mt. Gox subsequently filed for bankruptcy. Many Bitcoin users participating on the exchange are left with little recourse.
***

Before making any investment, carefully read any materials you are given and verify the truth of every statement you are told about the investment. For more information about how to research an investment, read our publication Ask Questions. Investigate the individuals and firms offering the investment, and check out their backgrounds by searching the SEC’s IAPD website or FINRA’s BrokerCheck website and by contacting your state securities regulator.

Additional Resources

SEC Investor Alert: Ponzi Schemes Using Virtual Currencies
SEC Investor Alert: Social Media and Investing – Avoiding Fraud
SEC Investor Alert: Private Oil and Gas Offerings
SEC Investor Bulletin: Affinity Fraud
FINRA Investor Alert: Bitcoin: More Than a Bit Risky
NASAA Top Investor Threats
IRS Virtual Currency Guidance
European Banking Authority Warning to Consumers on Virtual Currencies

IRS GIVES OPINION OF VIRTUAL CURRENCY LIKE BITCOIN

FROM:  THE INTERNAL REVENUE SERVICE 
IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply 

WASHINGTON – The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as Bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

• Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
• Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
• The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.