Financial institutions across the EU should be discouraged from buying, selling or holding virtual currencies, to ensure they are “shielded” from the dangers in the sector, the region’s banking regulator has said this morning, Fast FT reports.
In an opinion addressed to lawmakers, the European Banking Authority argued that the potential benefits of virtual currencies such as Bitcoin are outweighed by a long list of risks, which in the long term could only be fully addressed by a major regulatory overhaul.
However it cautioned that such a full-blooded regulatory regime would be hugely complex, expensive and burdensome to bring into force.
Immediate action should include dissuading financial institutions such as banks from purchasing Bitcoin and other e-currencies, and declaring virtual currency exchanges ‘obliged entities’ which must comply with anti-money-laundering and counter-terrorist financing rules.
However the EBA said financial institutions should continue to be allowed to maintain a current account relationship with businesses active in the field of virtual currencies, and that virtual currency schemes should be permitted to innovate and develop outside the perimeter of the financial sector.
The intervention comes as countries weigh potential responses to the rise of virtual currencies and investors fret about the possible pitfalls following the failures such as Mt Gox, one of the oldest Bitcoin exchanges.
In its opinion the EBA set out more than 70 hazards surrounding virtual currencies, including accounts being hacked, counterparties failing to meet payment terms, users losing their passwords, failures by virtual currency exchanges, and criminal and terrorist activity.
A full body of regulation to address these risks would need to include governance requirements for market participants, segregation of client accounts, capital requirements on virtual currency players, and the creation of so-called ‘scheme governing authorities’ that are accountable for the integrity of a virtual currency scheme.
The EBA said: “While there are some potential benefits of VCs, for example reduced transaction costs, faster transaction speed and financial inclusion, these benefits are less relevant in the European Union, due to the existing and pending EU regulations and directives that are explicitly aimed at faster transaction speeds and costs and at increasing financial inclusion.”
It added: “The risks, by contrast, are manifold.”
The EBA in December issued a rare customer warning telling European users of virtual currencies they face violent fluctuations in the value of their investments and the possibility of accounts being hacked.
