EBA/Op/2014/08
4 July 2014

One of the 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. In September 2013, ‘virtual currencies’ emerged on the EBA’s radar as one of the many innovations to monitor. Following three months of analysis, the EBA issued a public warning on 13 December 2013, making consumers aware that VC are not regulated and that the risks are unmitigated as a result.

The question that remained unaddressed at the time was whether Virtual Currencies (VCs) should or can be regulated. This EBA Opinion sets out the result of this assessment and is addressed to EU legislators as well as national supervisory authorities in the 28 Member States.

VCs are a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a FC, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically. The main actors are users, exchanges, trade platforms, inventors, and e-wallet providers.

While there are some potential benefits of VCs, for example, reduced transaction costs, faster transaction speed and financial inclusion, these benefits are less relevant in the European Union, due to the existing and pending EU regulations and directives that are explicitly aimed at faster transactions speeds and costs and at increasing financial inclusion.

The risks, by contrast, are manifold. More than 70 risks were identified across several categories, including risks to users; risks to non-user market participants; risks to financial integrity, such as money laundering and other financial crime; risks to existing payment systems in conventional FCs, and risks to regulatory authorities.

Numerous causal drivers for these risks were identified too, as these indicate the regulatory measures that would be required to mitigate the risks. The risks include the fact that a VC scheme can be created, and then 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; that payer and payee can remain anonymous; that VC schemes do not respect jurisdictional boundaries and may therefore undermine financial sanctions and seizure of assets; and that market participants lack sound corporate governance arrangements.

A regulatory approach that addresses these drivers comprehensively would require a substantial body of regulation, some components of which are untested. It would need to comprise, amongst other elements, governance requirements for several market participants, the segregation of client accounts, capital requirements and, crucially, the creation of ‘scheme governing authorities’ that are accountable for the integrity of a VC scheme and its key components, including its protocol and transaction ledge.

However, whilst such a ‘long-term’ regime is not in place, some of the more pressing risks identified will need to be mitigated in other ways. As an immediate response, the EBA recommends that national supervisory authorities discourage credit institutions, payment institutions and e-money institutions from buying, holding or selling VCs.

The EBA also recommends that EU legislators consider declaring market participants 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 and thus subject to its anti-money laundering and counter terrorist financing requirements.

This immediate response will ‘shield’ regulated financial services from VC schemes, and will mitigate those risks that arise from the interaction between VC schemes and regulated financial services. It would not mitigate those risks that arise within, or between, VC schemes themselves.

Other things being equal, this immediate response will allow VC schemes to innovate and develop outside of the financial services sector, including the development of solutions that would satisfy regulatory demands of the kind specified above. The immediate response would also still allow financial institutions to maintain, for example, a current account relationship with businesses active in the field of VCs.

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