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Summary:

The European Banking Authority, which has already pointed out that consumers using bitcoin do so without regulatory protection, has issued an opinion listing 70 risks of virtual currencies and laying out the legislative measures needed to make regulation possible.

Bitcoin Europe

Europe’s top banking regulator has warned European lawmakers and the union’s national financial regulators that they should discourage banks and other payment institutions from dealing in bitcoin and other virtual currencies — for now at least.

Unlike in China, this is not an outright ban, but the opinion does carry a lot of weight. The European Banking Authority (EBA), which has already warned consumers that they have little protection if they dabble in virtual currencies (VCs), said on Friday that the use of such currencies carries many risks, and requires a swathe of new legislation if it is to be properly regulated. In the meantime, it said, regulated financial services should avoid crossing paths with the virtual currency world.

That’s not to say the EBA saw no upside to currencies like bitcoin; it noted the potential advantages of faster, cheaper transactions and greater financial inclusion. However, it said the risks outweighed those benefits, certainly in the European context.

Risk management

In fact, the EBA came up with a whopping 70 risks of using and dealing in virtual currencies. I recommend reading the opinion (PDF) for the full run-down (from page 22), but they range from “User is unable to access VCs after losing passwords/key to their e-wallet” to “Market participants suffer losses through information inequality regarding other actors” to “Criminals are able to launder proceeds of crime because they can deposit/transfer VCs anonymously.”

So far, so familiar. However, the EBA’s prescriptions for legislating this whole mess into safety will not win it many fans within the virtual currencies scene. For a start, the EBA recommends that each virtual currency scheme, like bitcoin for example, must involve a “governance authority” that’s answerable to regulators.

This body would be “responsible for maintaining the integrity of the central transaction ledger, the protocol, and any other core functional component of the scheme.” That appears to be fairly antithetical to the nature of a decentralized system like bitcoin, where the network and its core algorithms do such things.

The EBA is not ignorant of this seeming incompatibility, and it claimed in its opinion that the creation of a scheme governance body – the members of whom would need to meet various fitness and probity standards — doesn’t preclude the decentralized issuing of currency via protocol and transaction ledger.

The authority went on to write:

If it is true that the decentralised VC schemes are secure, it should be possible for market participants to establish themselves as scheme governance authorities. However, if a legal person is not able to exercise authority over market participants and is therefore unaccountable to a regulator for compliance purposes, it would be unreasonable to expect a regulator to guarantee integrity in their place.

Consumer protection

Other regulatory recommendations are less contentious. Those burned by the the implosion of MtGox, for example, would probably be quite keen on the idea that regulated virtual currency outfits should have sufficient funds to meet their obligations, keep their systems secure and regularly audit their records.

And how about the recommendation that virtual currency operations refund payers in the case of an unauthorized transaction, as already happens with credit cards? Good consumer protection, but again a million miles away from current bitcoin standards. The EBA opinion will take a while to pick through, and its recommendations would take a long time to institute, if indeed that’s possible.

Circle CEO Jeremy Allaire said in April that bitcoin will only emerge as a global payment platform if and when governments and regulators embrace interaction between the traditional banking sector and the new guard. If he’s right – and I strongly suspect he is – then this harmonious future will take a while to arrive.

  1. Sooooo …the banks don’t like it. Yeah. Not too much surprise there. In other news, MasterCard filed a patent for the usage of bitcoin and it’s network for some overseas transactions, in what might be a realization of, “if you can’t beat ‘em, join ‘em.” Similar patents have been filed over the last 2-3 months by Western Union, eBay, and, I believe JP Morgan (source needed on the last reference). If you don’t understand what bitcoin actually is and what it’s potential is, follow the money. When central banks and major corporations like overstock.com, expedia (hotels division) and DishNetwork have already begun accepting it, than you can be rest assured that there is “something more to it” than what most skeptics and other dissenters are attempting to ridicule. The U.S. govt auction this past weekend of 4 blocks of the crypto-currency valued at around $19.5M worth of bitcoin seized from SilkRoad last year (an online drug exchange) was purchased by a single investor, and apparently philanthropist, who will be setting up infrastructure in several countries, in particular in Argentina, where local currencies and economy have been plagued by a weak national dollar. The implications are significant, economically, as they may now have a hedge against inflation within economically unstable nations – think Cypress, last March. The idea of microcosms and micro economies tying a “store of value” more associated with stronger economies can bring hope to workers who toil 40-60 hours a week to bring in the equivalent of about $35 a month(!) in the own local currency. Furthermore, we are only just now learning that the bitcoin network, specifically the open-source General Ledger (called The Blockchain”) can accommodate the transmission of peer-to-peer reviewed documents, negotiations and other Agreements, such as Deeds of Trust, Title, Wills, Stock Certificates, and other signed and bound papers and commitments, without the need, necessarily, of 3rd Party Arbiters, Banks, Agents and Brokers. This aspect has not yet been covered within much of the MSM news, as it is typically not in the corporate medias best interest, as most of the ties to big corporate level Main Stream Media are Central Banks. Chew on that a moment!

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