Don't buy, hold or sell Bitcoin or other virtual currencies until a proper regulatory regime is in place, the European Banking Authority (EBA) warned European banks on Friday.
While virtual currencies offer some potential benefits, they are outweighed by the risks, the EBA concluded following a thoroughassessment of virtual currencies.
The potential benefits include faster and cheaper transactions, making the services more affordable for low income groups, the authority said. However, the EBA identified more than 70 risks across several categories, including risks for users and for market participants, risks related to financial integrity such as money laundering and other financial crimes, and risks for existing payments in conventional currencies, the authority said.
A virtual currency scheme can be created by anyone, and in the case of Bitcoins, by anyone with sufficient computational power, the authority said. Within the Bitcoin system, individuals validating transactions, called miners, can remain anonymous, as can payer and payee, it said.
Moreover, virtual currencies do not respect jurisdictional boundaries and may therefore undermine financial sanctions and seizure of assets, while IT security cannot be guaranteed and market participants lack sound corporate governance arrangements, it added.
"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," the EBA said, adding that a regulatory approach would in particular need to cover governance requirements for several market participants.
It would also need the segregation of client accounts, and, crucially, the creation of "scheme governing authorities" that are accountable for the integrity of virtual currency and its key components, including its protocol and transaction ledger, the EBA said.
Mandating such a central authority for, say, Bitcoin, would strip it of what many of its proponents see as a key advantage: decentralized control.
In the absence of such centralized systems, the EBA advised national supervisory authorities to discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies. This approach will protect regulated financial services, but does not address risks arising within, or between, virtual currencies schemes themselves, the EBA said.
EBA's assessment of how to regulate virtual currencies was carried out jointly with the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA). It was sent to the EU Council, the European Commission and European Parliament seeking to put in place appropriate supervisory and regulatory practices for virtual currencies.
Loek is Amsterdam Correspondent and covers online privacy, intellectual property, open-source and online payment issues for the IDG News Service. Follow him on Twitter at @loekessers or email tips and comments to firstname.lastname@example.org