Bitcoin: US Market Watchdog Warns Investors on Risks

US market regulator Securities and Exchange Commission (SEC) on Wednesday cautioned investors on pitfalls associated with bitcoins, saying the virtual currency has the potential to give rise to frauds and also presents high risk investment opportunities.

After sparking off a frenzy among investors in many countries, the bitcoin came to be viewed as a risky proposition following the fall of Japan-based Mt. Gox - once the world's largest bitcoin exchange.

Noting that bitcoins are not legal tender, the US market watchdog has said the use and exchange of this virtual currency could be restricted by any government.

Issuing the alert, SEC's Office of Investor Education and Advocacy said it is to make investors aware about the potential risks of investments involving bitcoin and other forms of virtual currency.

"A new product, technology, or innovation - such as bitcoin - has the potential to give rise both to frauds and high-risk investment opportunities," the alert said.

"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," it noted.

Flagging off security concerns with regard to this virtual currency, the US regulator noted that bitcoin exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware.

"Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government."

This is not the first time American regulators are raising concerns about virtual currencies such as bitcoins. The market regulator had earlier warned about risks related to bitcoins in the context of ponzi schemes.

The Financial Industry Regulatory Authority (FINRA) recently cautioned investors about the risks of buying and using digital currency such as bitcoin.