EBA To Banks: Steer Clear of Virtual Currencies Till Regulations In Place After Bitcoin Debacle
EBA To Banks: Steer Clear of Virtual Currencies Till Regulations In Place After Bitcoin Debacle
Banks in the EU must refrain from offering customer accounts in virtual currencies till regulatory safeguards come into place, according to the bloc's banking watchdog. The EU's executive European Commission has indicated that it is imperative to look at the regulation in the quickest possible time.
Bitcoin is probably the most well known and most notorious of the 200 or so computer generated virtual currencies. Bitcoin started circulating in 2009 and it gained a lot of acceptance as merchants allowed customers to pay for goods and services in the currencies in recent times before concerns started surfacing.
Virtual currencies are unlike conventional cash in that they are not backed by any government or central bank. Such currencies have come under scrutiny after Tokyo-based exchange Mt. Gox became bankrupt in February following the loss of estimated $650 million worth of consumer bitcoins.
The EBA has just published a study where a new regulatory framework has been suggested along with advice to banks to stay away from virtual currencies till the rules are in place. The immediate response helps to shield regulated financial services from virtual currency schemes and this is essential for risk mitigation arising from interactions between virtual currency schemes and regulated financial services.
Currently, there has been no coordination or global effort for the regulation of virtual currencies except for the EBA which has chalked out a framework for streamlining virtual cash. As of now, no country in the world has given any virtual currency such as bitcoin legal tender status. The advice provided to the banks is to allow financial firms to ensure maintenance of current or checking account relationship with businesses that are active in virtual currencies.
One of the new rules it wants to see in place is a requirement for currency exchanges to hold capital to prevent problems in case they go bust. If situations like Mt. Gox repeat themselves, then at least there will be enough resources to support the consumers.
The EBA has identified around 700 risks to users, market participants as well as the financial system such as money-laundering and other financial crimes. So-called miners who unlock new bitcoins online have developed the capacity to block transactions if they so want. The EBA has cautioned that the virtual currency scheme must not be changed at the whim of a virtual power. Another potential roadblock is that miners, payees and payers can choose to protect their identity so IT security cannot be guaranteed and financial viability of market participants remains uncertain.
Rules are required to be in place so that virtual currencies can operate in an organized way. Customer money should also be kept separate and bodies need to be set up for ensuring accountability for the virtual currency. Clearly, virtual currencies have a long way to go before they are safe for use in the real world.
