SEC warns investors over bitcoin risks

The U.S. Securities and Exchange Commission (SEC) on Wednesday issued an alert to warn investors about the potential risks of investments involving bitcoin and other forms of virtual currency.[Special coverage]

"A new product, technology, innovation -- such as Bitcoin -- has the potential to give rise both to frauds and high-risk investment opportunities," the SEC's Office of Investor Education and Advocacy said in a notice. "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."

Bitcoin has become the most widely known virtual currency since it was created in 2009, which can be exchanged for traditional currencies such as the U.S. dollar or used to purchase goods or services.

But the SEC cautioned that bitcoin operates without central authority or banks and is not backed by any government, and its exchange rate has been very volatile.

The financial regulator also highlighted the security concerns, as bitcoin may be stolen by hackers and bitcoin exchanges may permanently shut down due to fraud, technical glitches or hackers.

In February, Mt. Gox, once the world's largest bitcoin exchange, suddenly shut down in Tokyo after hundreds of millions of dollars' worth of bitcoin had been stolen following a number of cyber attacks.

The SEC had previously issued an investor alert about the use of bitcoin in Ponzi schemes. The Financial Industry Regulatory Authority also recently warned investors about the risks of buying and using digital currency such as bitcoin.

Zhou Xiaochuan, governor of the People's Bank of China (PBOC), said last month that bitcoins are more like tradable assets than payment currencies.

The Chinese central bank has prohibited domestic financial and payment institutions from conducting bitcoin related business to guard against risks.