While plenty of consumers and investors ponder both the value and future of bitcoin, MarketWatch has learned that one state securities regulator is poised to issue a warning about dealing with exchanges that handle trading in the virtual currency.
Joseph Borg, state securities administrator in Alabama and a past president of the North American State Securities Administrators Association, says he plans to issue a consumer alert Tuesday, suggesting that if consumers and investors have trouble redeeming bitcoins or cashing out of their accounts, they stop trading—or adding to their holdings on account—until issues are resolved.
Borg has been involved in a wide range of high-profile cases in his 20 years on the Alabama Securities Commission perhaps most notably pushing for the formation of the multi-state task force that ultimately shut down Stratton Oakmont, the investment firm that was the basis for the recent movie “The Wolf of Wall Street.”
That’s particularly bad news for Mt. Gox, the largest bitcoin exchange, as Borg says his move was prompted by seeing a string of correspondence showing the frustrations some Gox customers have had in trying to get their money out.
After exchanging emails or chatting with about 60 crypto-currency traders (some have already moved away from BTC), it’s clear to me that issues related to making withdrawals from one’s accounts are all too common, with some describing the money being held in “Mt. Gox jail.”
“If it was an investment we were talking about, we’d be moving to shut somebody down or to make them step up and take care of business properly.”
Joseph Borg, state securities administrator in Alabama and a past president of the North American State Securities Administrators Association
Investors describe repeatedly being asked to provide information that any reputable financial company should not have had to request, such as linked bank account numbers, amounts on account with the exchange—both in bitcoins and in dollars—and more. Expedited requests—where customers were willing to pay fees of 5% to have withdrawals processed “manually”—wound up taking weeks and were going unfilled; Borg noted that, in this day and age, any suggestion that “manual processing” is faster is alarming.
Borg says he’ll cite recent reports from a survey from CoinDesk, a leading bitcoin news/information site, showing that nearly two-thirds of Mt. Gox users were still awaiting funds; some had waited as long as three months. He mentioned numerous examples—again, in some cases after looking at emails Mt. Gox users shared with MarketWatch—in saying, “If it was an investment we were talking about, we’d be moving to shut somebody down or to make them step up and take care of business properly.…If it took you a month or two or three to get your money out of a brand-name brokerage firm, you’d be worried that something bad is going on, and that’s with a firm where you really aren’t worried that your money is gone…Their experiences, honestly, look very bad.”
More than a dozen regulators I spoke with for this column said they saw issues exactly in line with Borg’s concerns, but felt that bitcoin exchanges were out of their purview, even if the customers—the theoretical victims if an exchange were to collapse—were in their state or region. It’s largely out of the regulators’ purview because most of the operators are located offshore.
“Dealing with these exchanges should be no different than dealing with your bank or your financial institution,” Borg said, “and we would tell you that you never do business with a bank that does not know you have money on account, or that is asking for your passwords or that doesn’t seem to remember the account links you established when you started the account. Now we are saying that you should never do business with a bitcoin exchange that has the same problems, or that has to ask you how much bitcoin you’ve got.”
Bitcoin prices are falling sharply after Mt. Gox, the major exchange’s virtual currency, said it was forced to halt withdrawals for customers. Michael Casey reports on MoneyBeat. Photo: Getty Images.
Borg noted that the visible issues some investors have had with certain exchanges might have investors wondering if the entire crypto-currency world is a rip-off. But he stopped far short of that kind of warning, and said it’s entirely possible that investors’ experiences could vary entirely based on how they trade bitcoin, the same way stock investors would have different experiences using a respected brokerage firm and a boiler-room shop. Gox is arguably the biggest name, but it’s clear from my discussions with traders that it is also the operation that gets the least respect, particularly among veteran traders. Mt. Gox did not respond to a request for comment.
Borg did say—and suggest that his published warning will say—that the validity of any crypto-currency “is a matter of perception.”
The big issue is not the value of the currency so much as “execution” and “settlement” of transactions.
Because crypto-currencies aren’t backed by any government and operating, in most cases, through offshore exchanges, most regulators have been watching the evolution of these issues into investments without feeling like they have any jurisdiction.
The bitcoin users I’ve spoken to are quick to acknowledge that the bad experiences are mixed in with the good. A number have told me that they believe that Mt. Gox will fail—and must—for bitcoin to move forward and build on its reputation.
Even as bitcoin becomes more mainstream, however, there are questions. A bitcoin automated-teller machine was installed recently in Boston’s South Station, and was quickly overrun with interest; that said, a local television station reported that one issue with using bitcoin was that the $21 they put into the crypto-currency was worth just over $19 when they went to use it a short-time later at Thelonious Monkfish, a Cambridge fusion restaurant that accepts bitcoin for payment. The difference was simply the minute-by-minute fluctuations in the bitcoin exchange rate.
The CEO of Mt. Gox resigned from the Bitcoin Foundation over the weekend, the latest development following a slew of technical issues that have hindered the bitcoin exchange. Robin Sidel reports on digits. Photo: Getty Images.
Bitcoin users—in fact users of the nearly 100 less well-known crypto-currencies currently in early trading stages around the globe—seem willing to overlook a lot of issues because the currency is new and emerging, and believe they will be proven right in the end about the profit potential in trading virtual currencies.
It doesn’t matter to them that bitcoin and the other currencies sound a bit like a story from a sci-fi movie script, or that the currency was born less than a decade ago, or that it has no government backing. Those facts, if anything, arouse interest in traders rather than temper it.
That’s why Borg felt he had to become the first regulator to step in.
“If someone wants to give this a try and they know what they are getting into, fine,” he said. “I can’t say this is an investment scam or a scheme. But I can say something here that I think applies to all investments—but especially anything where you really can’t expect to have any legal recourse if things go bad: if you try trading these things and you can’t get your money out, maybe you should stop right there until you can. Sure, it’s a new thing, but that doesn’t mean that the same old warning signs won’t still be a clue that you are headed to trouble if you keep going.”