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SEC: Bitcoin Believers Are Ripe for Scammers

The U.S. Securities and Exchange Commission issued an official alert to investors on Wednesday about the risks of Bitcoin or other virtual-currency related investments. One of the biggest dangers, according to the SEC, is simply that investors check their common sense at the door when fraudsters come pitching something sexy and apparently innovative.

“A new product, technology, or innovation—such as Bitcoin—has the potential to give rise to both frauds and high-risk investment opportunities,” the notice starts. “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.”

For those who can’t resist the lure of such virtual-currency investments—even after recent cautionary tales, such as the Mt. Gox blowup—the SEC has some practical advice, nearly all of which would seem to apply equally to any investment. Avoid schemes that “guarantee” high investment returns, come from individuals or investment firms that are not licensed or registered with securities regulators, and arrive unsolicited from unknown senders.

But another thing applies more particularly to Bitcoin’s true believers: If you were an early adopter of Bitcoin, the SEC suspects you will make a particularly enticing target. “Scam artists take advantage of Bitcoin users’ vested interest in the success of Bitcoin to lure these users into Bitcoin-related investment schemes,” the notice warns. “Fraudsters and promoters may solicit investors through forums and online sites frequented by members of the Bitcoin community.”

Finally, the nature of Bitcoin makes recourse difficult, in the event you’re taken in by a scam. Law enforcement faces challenges in investigations involving Bitcoin, since the nature of the currency makes it hard to trace or seize or freeze ill-gotten gains.

The SEC last July published an investor alert (pdf) about Ponzi schemes using virtual currencies. But the danger to investors seems to be rising in regulators’ minds as Bitcoin’s popularity increases and legitimate, but high-risk investment opportunities expand along with fraud. Digital currency is one of the top 10 threats to investors, according to the North American Securities Administrators Association.

Lawrence is a reporter for Bloomberg News in New York.

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