Digital currencies are relatively new with little protection for users. Here are five things to know about the risks and dangers of using digital currency.
While digital currencies have been around for a couple years, we’ve seen an increase in use of them recently. It’s important to understand what they are and the numerous risks associated with using them.
Digital currencies are completely electronic funds that are not issued or backed by any government or central bank. The most popular and well-known type of digital currency is Bitcoin. They can only be stored in a digital wallet that you access with your 64-number/letter private key. Your private key is unique to you and your digital wallet and should never be shared. To transfer or receive digital currency, you use your public key.
There are a number of risks and dangers associated with using digital currencies.
Five Things To Know
- Digital currencies are not federally insured. Digital currencies are not backed by a government or central bank, they are decentralized and rely on users to verify and maintain accuracy. Your digital wallet does not come with the same protections offered by saving money in a federally-insured financial institution.
- Digital wallets and digital exchanges can be hacked. If you store your digital wallet on your hard drive or computer and it is hacked, you may lose all of your digital currency. Additionally, companies that hold your digital currencies can get hacked and again, you could lose everything. This happened in 2014 with one of the largest Bitcoin exchanges, Mt. Gox, who announced that it had lost almost $400 million of customer funds and filed for bankruptcy protection.
- There are multiple digital currency scams. As with anything – if it seems too good to be true, it’s probably a scam. With digital currency, there are no central banks or government regulations, so it’s easy for scammers and fraudsters to take advantage. Be wary of Ponzi schemes, high-yield investment promises, mining investment scams, wallet scams, credit card/exchange scams, and phishing scams.
- No protection from digital currency fraud, theft, or scam. When you use your debit card, you are covered if something happens to your account. This is not the case with digital currency. If your digital currency is stolen or you lose your private key, no one is there to help you recover your losses. Each digital currency company and exchange may have their own policies regarding fraud, theft, or scam, so be sure to know if anything is covered.
- Virtual Currency Exchanges are not always trustworthy. Virtual currency exchanges are required to register with the Financial Crimes Enforcement Network as money services businesses, but this registration doesn’t mean the exchange is trustworthy.
Before using digital currencies, make sure you are aware of the risks involved. Digital currencies are relatively new and extremely volatile with very little protection and security for users.
It is our current policy not to accept any international digital currency transactions or digital currency transactions on business accounts. We do this to protect our members and our credit union from risks associated with digital currency. If you have any questions about this, please contact us at 512.302.6800.