Steve Kovach/Business Insider
An investor alert from the Financial Industry Regulatory Authority (FINRA) titled "Bitcoin: More Than A Bit Risky" paints the currency as a shady and troubled speculative vehicle ultimately doomed to fail.
Bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts bitcoins, bitcoins will become worthless ... Platforms that buy and sell bitcoins can be hacked, and some have failed ... Unlike US banks and credit unions that provide certain guarantees of safety to depositors, there are no such safeguards provided to digital wallets ... In part because of the anonymity Bitcoin offers, it has been used in illegal activity, including drug dealing, money laundering and other forms of illegal commerce.
This is just a small portion of the alert, but FINRA's stance is clear: avoid Bitcoin. This is basically what one would expect it to say — Bitcoin is still very volatile and the currency is still in its nascent phases.
Brett Stapper of Falcon Global Capital has composed an open letter to FINRA in response, hoping to clarify some confusing issues. He writes:
My name is Brett Stapper and I am the co-founder and Director of Falcon Global Capital, a new Regulation D private investment fund which trades exclusively in the Bitcoin markets.
I was very pleased to read your report issued yesterday advising investors to be cautious when investing in bitcoin. While Bitcoin is a new and exciting market, it has been subject to massive fraud in the past and that will certainly be the case for the future, as with any industry. It is important for investors to understand the difference between Bitcoin the technology, bitcoin the currency, and, Bitcoin companies. Bitcoin is a technology that bitcoin the currency is built on. Bitcoin companies simply operate within this set of protocols. Just like the internet isn’t to blame when a website is fraudulent, it is not fair or logical to blame Bitcoin the technology or bitcoin the currency when a private company operates unethically.
Now, more than ever it is important for investors to remain cautious when investing in Bitcoin or Bitcoin related companies. It is also the time for Bitcoin companies to step up and separate themselves from the companies with fraudulent intentions. This can be done by simply educating consumers and potential users with what to watch for.
Our company, as well as many others, are taking great steps in order to do this. I was hoping for the opportunity to provide consumers a list of questions they should ask prior to investing or using any Bitcoin companies or services.
A sample of this list, could be as follows.
1. Where is the company based?
2. Are they a legally registered corporation?
3. Do they allow clients to see their Bitcoin wallet holdings?
( With the Bitcoin network, it is possible to view the actual balance of a Bitcoin account. Many companies are now displaying this to customers. Instead of logging onto a website and being told you have 10 bitcoins, you can view it on the Blockchain and see for yourself)
4. If it is an investment company, are they registered with the SEC?
(This can be searched on the Sec.gov website)
5. Do they have 3rd party auditors in place?
6. Does the company list who the owners and executive staff or just simply ‘contact us’ page?
7. Does the company store the Bitcoins in a ‘Hot Wallet’ or ‘Cold Wallet’
(Hot wallets which are held online are much more susceptible to theft.)
8. What security measures are in place with account security and withdrawals?
9. Do they contract reputable 3rd party auditors to review accounts?
10. Do they open-source the non-private parts of their codebase?
11. Do they write any cryptography or just implement it? Do they do implement it in standard or custom ways?
At Falcon Global, We have taken the necessary measures to be as transparent as possible. Our Bitcoin wallet address will be available to publicly display our holdings, we have our Regulation D fund submitted with the SEC and are listed on their website, and, we have a globally recognised auditor which will be auditing our accounts on an annual basis. These are just three of the many steps we have taken in order to separate ourselves from the others and we hope that many other Bitcoin companies will do the same.
While slightly off topic, I would like point out it was recently estimated that over $500 million in Bitcoin has been stolen since 2010. While this is a shockingly and disappointingly high amount, it’s important to point out that annually in the US, merchants lose over 190 billion dollars per year due to fraud mainly in the form of chargebacks and identify theft. Consumers, lose almost 5 billion.
In December of 2013, 40 million credit card numbers were stolen from major retailer Target. With how Bitcoin works, this would not be possible. Payments are simply made from one user to the other (consumers or merchant) without the need to provide this information and have it held by a 3rd party (Target in this case). If those 40 million had paid target with a system like Bitcoin, this would have never occurred.
Bitcoin is one of the most exciting and innovative inventions we have seen in since the internet. It’s technology can truly revolutionize many industries that have long needed to be updated. The only way this can ever happen is if responsible steps are taken by companies, consumers, and, most importantly the regulators.
We live in a world of fraud, and the only way to beat it is with education and prevention. I would like to offer my services to FINRA in creating a report which can outline detailed steps that consumers can take in order to avoid fraud in Bitcoin. While doing this alone might be difficult as personally, I still have much to learn about Bitcoin, the Bitcoin community stands very strong together and I am confident we could quickly assemble a team of Bitcoin experts to assist. I would be more than happy to help in any way possible to make this happen.
Stapper has made similar points before. If Gmail goes down, we don't panic at "The End Of Email." Similarly, when Mt. Gox filed for bankruptcy, it shouldn't signal the "end" of Bitcoin.
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