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CONSUMER ALERT: Caution Urged in High Risk Bitcoin Transactions

Tuesday, March 18, 2014

 

Photo: Flickr, btckeychain

The Massachusetts Office of Consumer Affairs and Business Regulation advises that consumers use caution in purchasing the digital or virtual currency bitcoin due to the high-financial risks involved.

Last week, the largest bitcoin exchange shut down, resulting in the loss of hundreds of millions dollars worth of the digital currency.

Bitcoin ATM

A few weeks ago, a Bitcoin “ATM” opened up in Boston's South Station. While this operation closely resembles an ATM, the kiosk performs quite differently. It does not provide cash, but instead allows consumers to load bitcoins onto a virtual wallet either accessed by an app downloaded onto a smartphone or through a code provided on a piece of paper that is unique to each consumer.

Proponents of bitcoin make the point that this virtual currency allows for a faster, no-fee payment system, which is attractive to both merchants and consumers. While there is a demand for a faster and more efficient commercial payment system, the question is whether bitcoins are the most appropriate and safest alternative to satisfy that demand.

Before purchasing bitcoins either online or through a kiosk, consumers are strongly advised to consider the risks.

What are bitcoins?

Bitcoins are a type of decentralized virtual currency, meaning they are not issued or backed by the United States or any other government. They are also unregulated and uninsured, which means that consumers and businesses alike have limited recourse if they have a problem. Unlike the dollar, which is legal tender, no one is required to accept bitcoins as a form of payment.

While not tangible currency, bitcoins are bought by transferring real money through an exchange or to an individual, and are stored on computers or held by the purchaser or a third party in a so-called virtual wallet. Once the bitcoins are in your virtual wallet, you can use them to purchase items from any merchant willing to accept them or sell them to someone willing to buy them.

Consumer risks

The Massachusetts Office of Consumer Affairs and Business Regulation says consumers should pay particular attention to the following risks:

  • You can lose your money or bitcoins on an exchange: Consumer ramifications were seen first-hand when one of the largest bitcoin exchanges, Mt. Gox, abruptly closed down recently with no explanation. It was later revealed the exchange was hacked, and millions of dollars of bitcoins were stolen. Consumers were left hanging as to how they could recoup their lost money. Mt. Gox recently filed for Chapter 11 bankruptcy and reorganization in the Northern District of Texas, so consumers now have a process under which they can file claims.
  • Bitcoins can be stolen from your virtual wallet: Bitcoins are like cash – if they are lost or stolen, they are gone for good. If your virtual wallet is hacked, your bitcoins can be stolen. Also, if you forget your private “key” (similar to a PIN), your bitcoins are not replaceable.
  • The value of bitcoins can fluctuate rapidly: During the time it took Consumer Affairs staff to inspect the South Station kiosk, the value of the average of the four most common bitcoin exchanges fell $20 — it has since fallen hundreds of dollars. This rapid fluctuation means it is a high risk investment for consumers. The value could even drop to zero, making bitcoins worthless.
  • There are no consumer protections: Bitcoins are not FDIC insured. Unlike credit cards, you have no right to reverse the charges if something goes wrong. The South Station kiosk also has no disclosures, leaving consumers without information about fees or where to go if there is a problem. The Massachusetts Division of Banks is currently reviewing the operation of this kiosk to determine if it requires licensing.

 

Should consumers avoid bitcoins?

The Office of Consumer Affairs and Business Regulation warns that if consumers can't afford to lose money, they should not buy bitcoins.

For other consumers who are thinking about buying bitcoins, they should do their due diligence, just as with making any investment, and weigh all the risks. Understand how the currency works, know how much the currency is currently valued, and how (or whether) that value can be retrieved at any time in the future. After bitcoins are purchased, take proper precautions, including protecting your private "key" and not leaving large amounts in your virtual wallet.

How are bitcoins made?

Bitcoins are created through a sophisticated computer algorithm that requires extensive computer power. Creating new bitcoins is called “mining” and is something that is not available to the average consumer.

Basic Facts on bitcoins:

  • It’s a high-risk currency because of the volatility in its price.
  • It’s not backed by any central banks worldwide and has no tangible value.
  • It’s an experimental concept.
  • It’s unregulated and does not provide protection for consumers.
  • Consumer disclosure rules and regulations are limited or nonexistent.
  • It is not insured or backed by any government or regulatory structure.
  • No company is required to accept bitcoins as a form of payment.
 

Related Slideshow: 10 Big Companies with Recent Major Security Breaches

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Epsilon

March 2011

Tens of millions affected

In March 2011, Epsilon, the world's largest permission-based email marketing service, announced that the names and email addresses of customers of Citigroup, TiVo, and many other U.S. companies, were exposed in a huge data breach. The hack affected names and email addresses stored in over 108 retail stores, major financial firms and non-profit organizations like College Board. At the time of the incident, Epsilon had more than 2,500 clients sending 40 billion emails annually.

Result: Epsilon notified clients of the breach on April 1. Epsilon's clients then notified their customers of the hack. Epsilon has stated that 50 clients were affected, but the exact number of names and email addresses has not been released. Computerworld.com estimated that "tens of millions" of people were affected.

Prev Next

Sony

April 2011

77 million customers affected

In the spring of 2011, Sony was hacked through its through its PlayStation Network twice. The first security breach exposed customers' personal information to hackers, but not their credit card information. The second hack, disclosed in late April, did result in customers' credit card information being stolen. The pair of hacks affected 77 million people.

Result: Two weeks after the breach, Sony released a PlayStation 3 firmware update as a security patch. The firmware required users to change their password.

Prev Next

Global Payment Systems

March 2012

7 million customers affected

In the spring of 2012, the credit card processor service Global Payment Systems discovered that 1.5 million credit card records had been stolen from its system. Additionally, roughly 5.5 million consumer records were compromised, bringing the total to 7 million.

Result: As a result of the breach, Global Payments was delisted until it could prove it was in compliance with security standards. In April 2013, the payment card networks returned Global Payments its client list after it proved it was compliant with security standards.

Prev Next

Zappos

January 2012

24 million customers affected

In early 2012, the online retail store Zappos announced that it had been hacked, exposing the names, addresses, phone numbers, partial credit card numbers, and email addresses of 24 million customers.

Result: One day following the cyberattack, Zappos sent emails to all customers directing them to change their passwords.

Prev Next

Adobe Systems

October 2013

152 million customers affected

In October, the computer software company Adobe disclosed that hackers obtained personal data for almost 38 million of its customers, including names, credit and debit card numbers, and expiration dates. In November, it was discovered that the hackers had posted the personal data of more than 150 million Adobe users.

Adobe Call Center: 1-800-833-6687

For more information, MA residents may contact the Consumer Protection Division at the Office of Attorney General at 617-727-8400 or by email at [email protected].

Prev Next

Target

December 2013

110 million customers affected

In December, Target announced that 40 million customer accounts were hacked stealing encrypted PIN numbers, credit and debit card numbers, card expiration dates, and the embedded code on the magnetic strip on the back of cars. Additionally, 70 million customers' personal information was compromised.

Target Call Center: 1-800-440-0680  

For more information, MA residents may contact the Consumer Protection Division at the Office of Attorney General at 617-727-8400 or by email at [email protected].

Prev Next

Neiman Marcus

January 2014

1.1 million customers affected

In January, high-end retailer Neiman Marcus revealed more than 1.1 million customers were affected in hack. Between July 2013 and October 2013, customer payment cards could have been potentially visible to hackers. Additionally, 2,400 unique customer payment cards used at Neiman Marcus stores were subsequently used fraudulently.

Neiman Marcus Call Center: 1-888-888-4757

For more information, MA residents may contact the Consumer Protection Division at the Office of Attorney General at 617-727-8400 or by email at [email protected].

Prev Next

Yahoo

January 2014

Up to 81 million U.S. users

Late last month, Yahoo disclosed that Yahoo's email customers may have had their passwords compromised through a third-party application. The web company recently identified a coordinated effort to gain unauthorized access to Yahoo Mail accounts, and notified RI Attorney General Peter Kilmartin. Upon discovery, the Company took action, urging users to reset passwords on impacted accounts.

Yahoo Call Center: 1-800-318-0612

For more information, MA residents may contact the Consumer Protection Division at the Office of Attorney General at 617-727-8400 or by email at [email protected].

 

 

 

 

 

 

 

 

 

 

 

Prev Next

Michaels Stores

January 2014

Number of affected customers yet to be determined

In January, Michaels Stores announced that it is investigating a possible data security breach that may have led to customers' debit and credit card information being compromised. Michaels has more than 1,250 locations in the United States, including 29 in Massachusetts.

Michaels Stores Call Center: 1-800-642-4235

For more information, MA residents may contact the Consumer Protection Division at the Office of Attorney General at 617-727-8400 or by email at [email protected].

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White Lodging - Marriott, Hilton, Sheraton, Westin

February 2014

Number of affected customers yet to be determined



This week, the hospitality company White Lodging Services announced that a data breach occurred at 14 of its properties including Marriott, Radisson, Renaissance, Sheraton, Westin and Holiday Inn franchises around the country. Compromised information may have included names printed on credit or debit cards, the actual numbers, the security codes and expiration dates.



White Lodging Call Center: 219-472-2900.

For more information, MA residents may contact the Consumer Protection Division at the Office of Attorney General at 617-727-8400 or by email at [email protected].

 
 

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