04 July 2014
The European Banking Authority (EBA) published today an Opinion addressed to the EU Council, European Commission and European Parliament setting out the requirements that would be needed to regulate ‘virtual currencies'. The Opinion is also addressed to national supervisory authorities and advises to discourage financial institutions from buying, holding or selling virtual currencies while no regulatory regime is in place.
Following a thorough assessment of virtual currencies carried out jointly with other European authorities, each within its relevant mandate, such as the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA), the EBA 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, which in the European Union remain less pronounced.
The EBA identified in particular more than 70 risks across several categories, 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 (so-called fiat) currencies.
The causes for these risks were also investigated by the EBA. 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. The EBA also added that individuals validating transactions (so-called miners) can also remain anonymous, and so can payers and payees; IT security cannot be guaranteed; and 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, 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.
However, considering that no such regime is in place as of now, some of the more pressing risks will need to be mitigated in other ways. As an immediate response, the EBA therefore advises national supervisory authorities to discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies. 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.
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.
One of the statutory tasks of the EBA is to monitor new and existing financial activities and to adopt guidelines and recommendations with a view to promoting the safety and soundness of markets and convergence of regulatory practice.
The EBA started evaluating ‘virtual currencies' in 2013 and issued a public warning on 13 December 2013 to make consumers aware that virtual currencies are not regulated and that risks, as a result, are unmitigated.
In the opinion issued today, the EBA has brought forward its assessment of virtual currencies by addressing whether virtual currencies should and can be regulated.