A report on virtual currencies released last week by the Government Accountability Office showed that while the new development is part of a changing payments system, virtual currencies pose a number of risks to consumers and financial institutions.
Virtual currencies, such as bitcoin, are digital representations of value not tied to a central bank. Such systems operate over the internet and use encryption techniques to process and verify transactions.
Though the currencies can be used to purchase goods and services, the development has also been associated with illegal activity and security breaches, raising concerns among regulators, law enforcement and consumers.
In March, the U.S. Treasury’s Financial Crimes Enforcement Network released guidance requiring virtual currency exchanges to register with financial regulators, and federal agencies have begun to collaborate on virtual currency issues through working groups and informal discussions.
The GAO report said, however, that the CFPB has not participated in efforts to address the challenges of virtual currency systems, adding that the CFPB should “take steps to identify and participate in pertinent interagency working groups addressing virtual currencies, in coordination with other participating agencies”—the CFPB agreed with the recommendation.
According to the report, virtual currency systems provide users anonymity and lack a central intermediary, which could make it difficult to detect money laundering and other financial crimes. Law enforcement investigating crimes involving virtual currencies also have to rely on international partners who may be subject to different regulations and laws.
Additionally, the report said the rise of the currency presents a number of consumer and investor protection issues, such as the loss of funds, price volatility and the development of investment products.