The European Banking Authority (EBA) has called on national regulators to discourage banks and payment institutions from dealing in so-called virtual currencies such as Bitcoin to “shield regulated financial services” .
The EBA also recommends that EU legislators consider declaring virtual currency market participants who are “at the direct interface between conventional and virtual currencies, such as virtual currency exchanges”, to become ‘obliged entities’ under the EU Anti Money Laundering Directive.
A circular by law firm CMS Cameron McKenna at lexology.com says that the EBA is also calling for a “substantial body” of regulation of virtual currency market participants, including the establishment of governing authorities “accountable for the integrity of a virtual currency scheme and the imposition of capital requirements”, the firm says.
The risks fall into five broad categories:
- risks to users;
- risks to other market participants;
- risks to financial integrity;
- risks to payment systems in foreign currencies;
- risks to regulators.
The risks include, for example: “User suffers loss as a result of VC prices being manipulated (High)”; “Criminals are able to launder proceeds of crime because they can deposit/transfer VCs anonymously (High)”; and “Market participants suffer losses due to unexpected application of law that renders contracts illegal/unenforceable (Medium)”.
"SEPA reduces virtual currencies' advantages"
The EBA also lists a few benefits of virtual currencies, including their lower transaction costs and faster transaction speed compared with conventional fiat currencies. However, the EBA says that that advantage is reduced in the 34 nations covered by the incoming SEPA (single euro payment area) regulations. Moreover, part of the reason for lower costs is the current lack of regulation: should virtual currencies be regulated, then “compliance costs will negate at least some of the cost advantages that VC systems are currently enjoying”, the EBA says.
But as CMS comments, “One of the prime motivating factors behind the development of Bitcoin and other virtual currencies was to remove control of financial transactions from central governments, banks and large corporations. The EBA and other similar proposals envisage an undermining of these principles in favour of consumer protection and regulation.”
The firm adds, however, that, In June, Switzerland’s Federal Council said no new regulation was necessary and that virtual currencies such as Bitcoin could one day be awarded legal status as money, provided only that volatility reduced.
The article by CMS Cameron McKenna can be viewed on the lexology.com website
The EBA’s Opinion on virtual currencies can be viewed by clicking here