The financial consequences of investing in virtual currencies have become clearer following a £3.3 million hack of one of the UK’s leading Bitcoin platforms.
Bitstamp lost 19,000 Bitcoins when computer systems were compromised by hackers earlier this month.
The exchange investigated the incident and determined someone had hacked their systems and stolen the virtual currency.
As a result, the exchange has built a new online platform and preserved the old servers to help a criminal investigation.
The company’s CEO Nejic Kodric has apologised to clients and pledged the exchange will honour any financial obligations to customers who suffered a loss.
“Any Bitcoins held before the incident are safe and will be fully honoured,” he said. “All transactions between January 9 and 17 will also be commission free.”
During the chaos, Bitcoin investors wanted to know what would happen to their investments and whether they were protected by the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS) in the UK.
Specialist lawyers Cooley LLP confirm Bitcoin investors cannot access either of these watchdog services because Bitstamp does not carry on any regulated financial activities. This means the firm does not need to be authorised and regulated by the Financial Conduct Authority.
Another worry was whether the Bitstamp incident would affect the price of Bitcoin.
However, the price has hovered around the $290 mark for most of this month.
The lawyers suggest Bitcoin users and investors should follow the advice of the Bitcoin Foundation’s chief scientist Gavin Andresen, who said: “Holding Bitcoin is dangerous for ordinary investors, who should not use it for now, unless they’re technically proficient at keeping their own computers secure.”
No compensation from watchdogs
In other words, if investors lose the Bitcoin’s, they have nowhere to go for redress and cannot expect compensation unless the exchange holding their investment agrees to recompense them.
In a way, Bitcoin investors cannot expect to have their cake and eat it.
The currency is famously unregulated by any central bank or government and not pegged to any real currency, like the US dollar.
For most investors this is the very attraction of a virtual currency.
The downside is because Bitcoin is not regulated, it falls outside of protection offered by the Financial Ombudsman or FSCS in the UK.
Bitcoin is generated or ‘mined’ by solving complex computer problems, but can be bought or sold like foreign currencies through exchanges. These exchanges are targeted by regularly hackers who try to steal the currency.