Massachusetts regulators issued a strongly worded warning Tuesday about the risks of the virtual currency known as bitcoin after the opening of the second ATM-like kiosk in the Boston area that make it easier for people to buy it.
The warning, from the Office of Consumer Affairs and Business Regulation, urged consumers “to proceed with caution” because bitcoin and other so-called crypto-currencies can fluctuate wildly in value, saddling buyers with sudden large losses, and are vulnerable to hacking — as was the case in the collapse of one of the largest bitcoin exchanges, Mt. Gox.
“First and foremost, if you can’t afford to lose the money you have, you should not buy bitcoins,” state officials said in their advisory.
On Monday, the second bitcoin ATM in Massachusetts — and apparently just the fourth in the country — opened at the Clover Food Lab restaurant in Harvard Square. The company that installed and operates the machine, Liberty Teller of Boston, placed its first kiosk at South Station in Boston in February.
The machines allow buyers to deposit cash and get bitcoins that are stored in a digital wallet, the transactions managed by thousands of computers linked in a worldwide network.
So far, a handful of Boston-area restaurants and retailers accept the currency, whose value is determined by supply and demand.
In the one month since the machine in South Station began operating, the value of a bitcoin has fallen about $15 to around $615 Tuesday evening. But it had gyrated over a longer period; in November it hit a high of $1,242.
At least two other bitcoin machines have been set up in the United States, in New Mexico and Texas, while another is expected to open this week in California.
Barbara Anthony, undersecretary of consumer affairs and business regulation in Massachusetts, said her office is trying to determine whether the machines themselves are similar enough to an ATM that they must be licensed like one.
Under Massachusetts law, businesses other than banks that want to install an automated teller machine must get state regulators’ approval. The licensing process provides officials with grounds for rejecting a machine.
“We’re not saying we think it is” the equivalent of an ATM, Anthony said of the bitcoin equipment, “but it could be. And the question is, should it be licensed or not? Right now we haven’t come down either way.”
Liberty Teller cofounder Chris Yim said his company is not deterred by the state’s strongly worded warning. Yim said about 500 people have used the kiosk at South Station, and he added that he has constantly cautioned consumers to weigh the benefits and risks of using the currency.
Proponents argue bitcoin is faster and cheaper to use than other money-exchange programs or credit cards; it does not, for example, have the transaction fees common to debit and credit cards.
And though the bitcoin system was vulnerable to theft, so too are credit cards, Yim said, noting the enormous heist of card data recently from Target Corp., the retail chain.
“Every time you use a credit card, you’re turning over information for possible identity theft,” Yim said.
Digital currency is “like the Internet in the early days” — an innovation with huge potential but also a lot of misunderstanding to overcome, Yim said.
Before the kiosks, the only way to get bitcoins was to buy them through an online exchange or to accept them as payment from a bitcoin holder.
The founder of Clover Food Lab, Ayr Muir, said he agreed to install the machine in his restaurant on Holyoke Street in Cambridge after being approached by Yim, who like him graduated from the Massachusetts Institute of Technology.
Yim, Muir said, “asked if we would help him out with a little experiment to see if a hightraffic fast-food restaurant like ours would be a good site for one of the first bitcoin ATMs in the country. We’re giving it a go, and we’re excited to see what happens.”
The rapid rise of bitcoin and other virtual currencies has flummoxed traditional financial regulators, including those who oversee securities and banks. They are struggling to define the crypto-currencies with traditional financial definitions — is it a banking transaction or an investment, for example — that would then determine how or even whether they should be regulated.
So far, only one arm of the federal government, the Treasury Department’s Financial Crimes Enforcement Network, has weighed in definitively, classifying businesses that exchange real currency for virtual currency as money transmitters similar to Western Union that are subject to federal regulation.
But the newly installed chairwoman of the Federal Reserve, Janet Yellen, recently said the central bank does not have the authority to regulate bitcoins.
The use of virtual currency is “entirely outside the banking industry,” she said during a Senate Banking Committee hearing.
Meanwhile, a group of state banking regulators from around the country, led by David Cotney of Massachusetts, established a task force in late February to investigate digital currencies, including bitcoin. Issues being studied by the group include whether services related to bitcoin are operating legally.
“I think everybody is trying to get their hands around how to deal with this,” said Jon Skarin, senior vice president at the Massachusetts Bankers Association.
Virtual currencies are not federally insured, so consumers have no protection if they lose money or their accounts are hacked.
Bitcoin has also been associated with unsavory elements. It was the favored currency on the defunct website Silk Road, which allegedly served as a trading post for drug trafficking and money laundering.
And the sudden collapse of the bitcoin exchange Mt. Gox about a month ago has led to mistrust in the currency. In a bankruptcy filing in Japan, Mt. Gox said it may have lost the equivalent of about $520 million to hackers.
Robert Boutwell, a lawyer at Sally & Fitch LLP in Boston who specializes in bank litigation and has written about virtual currencies, said that market acceptance for bitcoin has increased in recent months. Prominent businesses such as Overstock.com and the Sacramento Kings have announced they will accept bitcoins for purchases, he said.
But the lack of regulation, Boutwell added, makes the bitcoin market “akin to the wild, wild West, with enormous exchanges disappearing almost overnight and reports of hacking and stolen bitcoin prevalent.”