European banking regulators are advising financial firms to avoid virtual currencies, such as Bitcoin, until a credible regulatory framework is in place.
The European Banking Authority (EBA) published an opinion today setting out the requirements that, it says, would be needed to regulate virtual currencies. In the meantime, it says that financial institutions should be discouraged from buying, holding or selling virtual currencies while no regulatory regime is in place.
The EBA says that after assessing virtual currencies jointly with other European authorities, such as the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA), it has concluded that, “while there are some potential benefits from virtual currencies, such as faster and cheaper transactions, as well as financial inclusion; however risks outweigh the benefits.”
In its opinion, the organization identifies more than 70 risks, including risks for users, market participants, risks related to financial integrity, such as money laundering and other financial crimes, and risks for existing payments in conventional currencies. “These include for instance that a virtual currency scheme can be created – and its function subsequently changed – by anyone, and in the case of decentralised schemes, such as Bitcoins, by anyone with a sufficient share of computational power, and anonymously so,” it notes. In addition to anonymity, it notes that IT security cannot be guaranteed; and, that the financial viability of some market participants remains uncertain.
“Based on this assessment, the EBA is of the view that a regulatory approach to address these risks would require a substantial body of regulation,” it says. “In particular, a regulatory approach would need to cover governance requirements for several market participants, the segregation of client accounts, capital requirements and, most importantly, the creation of ‘scheme governing authorities’ accountable for the integrity of a particular virtual currency scheme and its key components, including its protocol and transaction ledger.”
In the meantime, the EBA advises banking regulators to discourage credit institutions, payment institutions, and e-money institutions from dealing in virtual currencies. “This two-pronged approach will allow virtual currencies schemes to develop outside the financial services sector and will also allow financial institutions to maintain a current account relationship with businesses active in the field of virtual currencies,” it says.