New York Attorney General Letitia James has called on congressional leaders to enact legislation that would prevent retirement funds from being invested in digital assets, including cryptocurrencies, digital coins, and digital tokens. These types of investment vehicles, such as Individual Retirement Accounts (IRAs) and defined contribution retirement plans like 401(k) plans and 457 plans for government employees, are crucial for the retirement savings of many hardworking Americans. In light of recent developments where a prominent financial institution has introduced Bitcoin as an investment option in its 401(k) plans, with other financial institutions expected to do the same, Attorney General James emphasized the importance of safeguarding workers’ retirement funds and avoiding the risks associated with volatile cryptocurrencies in light of recent market crashes and other turbulence.
Attorney General James cautioned that if Americans were to invest their hard-earned retirement funds in plummeting cryptocurrencies, it could erase all their years of diligent efforts. The repeated instances of cryptocurrency hazards and turbulent fluctuations in these funds have been observed time and time again. It is unjust for diligent Americans to bear anxiety over the possibility of their retirement savings being decimated by speculative gambles on volatile assets like cryptocurrencies. Consequently, Attorney General James implored Congress to intervene and shield working families from the threat of their retirement accounts evaporating due to investments in crypto.
Two bills have been proposed in Congress to allow cryptocurrency investments in retirement plans and prevent regulators from limiting access to these investments. The Retirement Savings Modernization Act poses a risk to 401(k) retirement savings by exposing them to the volatility and illegalities associated with cryptocurrencies. Attorney General James argues in her letter that recent failures of high-profile crypto companies make digital assets unsuitable for retirement investments. For instance, the value of numerous cryptocurrencies dropped significantly this month after the collapse of FTX Trading Ltd., one of the largest crypto exchanges globally. Additionally, in May 2022, many cryptocurrencies experienced significant declines following the crash of TerraUSD, a stable coin. The failure of TerraUSD spread, resulting in $500 billion in losses across the wider crypto market.
Apart from these failures, Attorney General James warned that cryptocurrency prices exhibit extreme volatility due to their speculative nature rather than being an investment based on future cash flow. For instance, Bitcoin, which is the first and most widely known cryptocurrency, reached its peak at $68,789.63 on November 12, 2021, and recently dropped to as low as $15,599.05. However, there are no clear underlying factors that can explain why its value surged to over $64,000 within a year and then plummeted to under $20,000. Numerous previously established cryptocurrency companies have taken actions such as freezing customer withdrawals, announcing large-scale layoffs, or declaring bankruptcy, resulting in severe financial losses for investors.
Furthermore, Attorney General James emphasized that cryptocurrencies are frequently used as a tool for fraudulent activities and criminal behavior. For instance, the Federal Trade Commission (FTC) recently disclosed that over 46,000 individuals have reported a collective loss of more than $1 billion to scams related to cryptocurrency since the beginning of 2021. The FTC also highlighted the absence of any centralized organization or system that can identify suspicious transactions and intervene to prevent fraud, along with the irreversible nature of crypto transfers. Additionally, it was pointed out that most cryptocurrency issuers operate without oversight from regulators at the state or federal level. Consequently, investors do not have access to protective measures, such as those offered by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC), in the event of failures within digital asset companies.
In the past, Congress has implemented legislation to assist American workers in saving for their retirement. Attorney General James outlined a letter proposing legislative measures that Congress could consider for the safeguarding of workers’ retirement savings against cryptocurrency losses. These measures involve making slight modifications to current legal limitations on the investment of retirement savings.
What is cryptocurrency?
Cryptocurrency, as a digital payment system, operates independently of banks for transaction verification. Allowing for peer-to-peer functionality, it facilitates global payment transfers for anyone. Unlike physical currency, which is physically exchanged, cryptocurrency transactions solely exist as digital entries in an online database. These transactions are publicly documented in a ledger when cryptocurrency funds are transferred. Digital wallets are used for cryptocurrency storage.
Cryptocurrency is named as such due to its utilization of encryption for transaction verification, involving intricate coding in the storage and transmission of cryptocurrency data across wallets and public ledgers. The primary purpose of encryption is to ensure security and safeguarding.
Bitcoin, the initial cryptocurrency established in 2009, continues to be the most renowned to date. The primary motivation behind many individuals’ interest in cryptocurrencies is to engage in profitable trading, which occasionally leads speculators to significantly elevate prices.
How does cryptocurrency work?
Blockchain is a distributed public ledger on which cryptocurrencies operate, and it maintains a record of all transactions that is updated and maintained by currency holders.
Cryptocurrency units are generated through a procedure known as mining, wherein computer power is utilized to solve intricate mathematical problems and produce coins. Additionally, individuals have the option to purchase these currencies from brokers, subsequently storing and utilizing them with the aid of cryptographic wallets.
What you possess with cryptocurrency is not a physical entity, but rather a key that enables you to transfer a record or a unit of measure between individuals without relying on a trusted intermediary, if you happen to be the owner of such currency.
Despite Bitcoin’s presence since 2009, the realm of cryptocurrencies and the utilization of blockchain technology continue to develop within the financial sector, with anticipation of further applications in the future. The potential for trading various financial assets such as bonds, stocks, and others using this technology is a possibility down the line.
Cryptocurrency examples
There are numerous cryptocurrencies, with some of the most recognized ones being:
Bitcoin is a decentralized digital currency that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
Bitcoin, established in 2009, is the original cryptocurrency and retains its position as the most frequently traded. Satoshi Nakamoto is credited with creating the currency and is widely speculated to be a pseudonym for an entity or collective whose true identity is still elusive.
Ethereum, a decentralized open-source blockchain platform, allows users to build and execute smart contracts and decentralized applications.
Ethereum, created in 2015, is a blockchain platform that has its own cryptocurrency, named Ether (ETH) or Ethereum, and is second in popularity only to Bitcoin.
Litecoin is a decentralized peer-to-peer cryptocurrency that was created as a fork of Bitcoin and aims to be a “silver” to Bitcoin’s “gold.”
This currency closely resembles bitcoin but has been more proactive in advancing new innovations, such as faster payment systems and processes to accommodate a higher volume of transactions.
The general action or sound of something (such as water) moving in small waves.
Founded in 2012, Ripple is a distributed ledger system that enables the tracking of various transactions beyond cryptocurrency. The company responsible for its development has collaborated with numerous banks and financial institutions.
Altcoins, as opposed to the original, are the term used to refer to all cryptocurrencies other than Bitcoin.
Cryptocurrency fraud and cryptocurrency scams
Regrettably, there has been an increase in cryptocurrency crime, which encompasses various scams.
Fake websites are deceptive online platforms that display counterfeit reviews and cryptocurrency terminology to lure individuals with the promise of substantial and assured profits, as long as they continue investing.
Cryptocurrency criminals deceive people by advertising fake investment opportunities in digital currencies, giving the false impression of substantial returns by using new investors’ funds to pay existing investors. BitClub Network, a particular fraudulent scheme, successfully obtained over $700 million in funds until its organizers were charged in December 2019.
Scammers on the internet impersonate wealthy individuals or famous personalities in order to deceive people and fraudulently multiply their investment in virtual currencies. Instead, they steal the funds that are sent to them. To further manipulate investors, they might spread false information through messaging apps or online chat rooms, claiming that a renowned entrepreneur is endorsing a particular cryptocurrency. By convincing people to buy and causing the currency’s value to rise, the scammers then sell their own holdings, causing the currency’s worth to plummet.
The occurrence of romance scams is on the rise, according to the FBI, specifically in the realm of online dating. Fraudsters manipulate individuals they meet on dating platforms or social media, convincing them to engage in virtual currency investment or trading. In the initial seven months of 2021, the FBI’s Internet Crime Complaint Centre recorded over 1,800 complaints related to romance scams involving cryptocurrencies, resulting in a staggering loss of $133 million.
Alternatively, individuals may impersonate authentic virtual currency traders or establish fraudulent platforms to deceive individuals into providing them with money. Another type of cryptocurrency fraud includes deceptive advertising for retirement accounts in cryptocurrencies. Additionally, criminals engage in direct cryptocurrency hacking, wherein they unlawfully access digital wallets containing virtual currency to steal it.
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