The European Commission signaled it will try to impose rules on virtual currencies such as Bitcoin after the bloc’s banking regulator ordered lenders to shun them.
“It’s imperative to move quickly on this issue,”Chantal Hughes, a spokeswoman for Financial Services Commissioner Michel Barnier, said by e-mail today. “The potential for money laundering and terrorist financing is too serious to ignore.”
The Commission, the EU’s executive arm, moved after the European Banking Authority said banks shouldn’t buy, hold or sell virtual currencies until regulators develop safeguards to protect their integrity. The watchdog identified more than 70 risks linked to the currencies ranging from identity theft to the possibility hackers could target a trading platform.
Virtual currencies have come under increased scrutiny from regulators and prosecutors around the globe. Mt. Gox, once the world’s biggest Bitcoin exchange, filed for bankruptcy in Japanearlier this year amid claims it lost 850,000 Bitcoins. China’s central bank barred financial firms from handling virtual currency transactions last year.
“Regulators have become alert to the potential for fraud and disruption,” Richard Reid, a research fellow for finance and regulation at the University of Dundee, Scotland, said by e-mail. “Such attention from regulators is bound to curb the growth of markets such as Bitcoin.”
The EBA called on the EU to devise rules for trading platforms and start groups to oversee each internet currency to ensure that no individual can manipulate a currency. The EU should consider extending the scope of anti-money laundering law to better cover virtual currencies, according to the EBA.
“The EBA is of the view that a regulatory approach to addressing the risks it has identified would require a substantial body of regulation,” the regulator warned.
Widespread use of the currencies could also make it harder for central banks to steer the economy by making the effects of monetary policy harder to predict, the EBA noted.
Bitcoins emerged in 2009 out of a paper authored under the pseudonym Satoshi Nakamoto. Since then, retailers selling items from Gummi Bears to luxury homes have started accepting Bitcoins, and new companies have begun offering ways to ease its use as a payment system.
The currency gained credibility after law enforcement and securities agencies said in U.S. Senate hearings that it could be a legitimate means of exchange. The price of Bitcoins topped $1,000 as speculators anticipated broader use of digital money.
The price has since dropped to about $631 on Bitstamp, an online exchange based inSlovenia. It would cost around $8.4 billion to buy all the Bitcoins in existence, according to Bitstamp.
The EBA’s announcement is “not very helpful” and may only deter individual users of virtual currencies, according to Simon Dixon, a director of the U.K. Digital Currency Association, a group representing the country’s virtual currency industry.
“Banks are not engaging with digital currencies yet as it is a person-to-person network that operates outside of banking,” he said by e-mail. “The more likely result of the announcement is to scare people from using digital currencies rather than banks.”
EBA: Financial Institutions Should Avoid Bitcoin, Await Regulation
UPDATE (4th July 21:25 BST): This article has been updated to include responses to the EBA by the Bitcoin Foundation and the UK Digital Currency Association.
The European Banking Authority (EBA) has published an ‘opinion’ warning financial institutions to stay away from digital currencies until the industry is regulated.
In the document, which was addressed to the EU council, European Commission and European Parliament, the EBA set out new requirements for the regulation of digital currencies and also instructed financial institutions not to buy, hold or sell digital currencies until new rules are in place.
The EU banking watchdog further called for a “thorough assessment” of digital currencies carried out jointly with other European authorities, including the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA).
The EBA notes that there are some potential benefits from digital currencies, including faster, cheaper transactions and more financial inclusion. However, the EBA believes the risks outweigh the benefits, which are “less pronounced” in the EU.
The EBA identified more than 70 risks across several categories: from risks for users, to those that could affect existing payments in conventional currencies and financial integrity.
The principle risk outlined by the EBA is the fact that digital currencies remain decentralised and they can be created and changed by anyone with enough computational power, anonymously. The EBA singled out miners as a threat, since they can remain anonymous and IT security cannot be guaranteed.
As a result, the EBA believes a “substantial body of regulation” is necessary to address these risks, saying:
“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, some components of which would need to be developed in more detail. 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.”
EBA’s immediate response
Aware that the regulatory framework cannot be changed on short notice, the EBA says it is issuing an “immediate response” to address the issue.
It is advising national supervisory authorities to “discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies” until the new regime is in place.
“While this response will mitigate risks arising from the interaction between virtual currency schemes and regulated financial services, it will not address risks arising within, or between, virtual currencies schemes themselves,” the EBA points out.
It continues: “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.”
The recommendations are more or less in line with previous announcements and warnings from EU and national regulators, and also echo the EBA’s previous digital currency warning, issued last December. This time though, the EBA is calling for a comprehensive regulatory approach to digital currencies.
The Bitcoin Foundation rejected the EBA report’s recommendation that various financial institutions stop holding or trading in digital currencies in a statement issued today. The Foundation said doing so would come at “significant cost” to Europeans.
The Foundation also criticised the EBA report’s risk assessment methodology, saying that the “blunt” risk ranking used in the report created the impression that an overwhelming amount of risk is associated with digital currencies. A statement from Jim Harper, the foundation’s Global Policy Counsel, read:
“Europe’s states and people are figuring out for themselves how to get the benefits of Bitcoin while controlling the costs. They may not listen to the European Banking Authority.”
The UK Digital Currency Association also responded to the EBA today, saying that it is “unsurprised” by the banking association’s proposal as it is not aware of any UK banks currently offering banking facilities to digital currency businesses. It urged engagement from the EBA to create a framework that mitigates risk for all participants in a digital currency economy, and warned that “stifling” the development of digital currencies would be “detrimental to the greater public good”.