New York Attorney General Eric Schneiderman announced on Tuesday that he is investigating at least 13 cryptocurrency exchanges, including the popular platform Coinbase.
“Too often, consumers don’t have the basic facts they need to assess the fairness, integrity, and security of these trading platforms,” Schneiderman said in a statement.
Schneiderman said he hopes to make exchanges more accountable and transparent to their clients. Each company will be asked in a letter to supply information on its “operations, internal controls, and safeguards to protect customer assets.”
The news serves as a reminder that investing in cryptocurrencies is risky not only because they’re new and their value is volatile — even the places where you buy them can be suspect.
There are at least 190 exchanges in operation, with new ones popping up every day. Most of them don’t operate under any rules, regulations or obligation to replace your digital money should it lose all value, get lost, stolen or hacked. One of the first exchanges to go mainstream – Mt. Gox – ended in bankruptcy.
How do exchanges even work? To get started, investors sign up with an online exchange using their bank account, credit card or digital currency.
Yet instead of relying on a third party like a broker to execute a transaction as you typically do with a stock, bond or ETF, cryptocurrencies trade on decentralized platforms with no middle man.
“Is it a fly-by-night operation operating out of a P.O. box in the Bahamas or is it a genuine operation, of which we have many? “
Despite the uncertain space, experts say there are some exchanges that bring more risk than others. Here’s what you should consider about where you buy and sell your cryptocurrencies.
Always remember: These assets are incredibly volatile (In December, bitcoin was trading at more than $19,000. As of Wednesday, it was at $8,116). And so never invest more than you can afford to lose.
In addition, the IRS has labelled these currencies a property, meaning every transaction needs to be recorded and eventually taxed at your capital gains rate.
Find the right exchange for your location
Experts say if you’re in the United States, you would be wise to pick an exchange based in the United States.
Look for an address for the company. If you can’t find one, that should be a red flag.
If you don’t know where your exchange is located, “when you get hacked it’s going to be very difficult for you to even find the right jurisdiction in which you should sue the people who stole your money,” said Emin Gün Sirer, an associate professor of computer science at Cornell University who writes about bitcoin.