Banks should avoid bitcoin and other virtual currencies for now, EU regulator warns

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.

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