European Banking Authority begins the debate on an EU-wide virtual currency regulation

At the beginning of the month, the European Banking Authority (EBA), the institution charged with overseeing the European banking sector, proposed guidelines for a regulatory regime for virtual currency. The report has now been presented to the EU Council, Commission and Parliament for consideration. The report also issues guidelines for national supervisory bodies.

The report is an attempt to give an overall look at the ‘pros and cons’ of virtual currency in their current form, and ultimately how the ‘cons’ may be addressed. It is quick to highlight their potential benefits, including lower transaction costs, higher transaction speed and greater financial inclusion on a global scale. At the same time, the report sends a strong warning to financial institutions regarding the risks. In some ways this is not new. At the end of last year the EBA issued a warning on a series of risks deriving from buying, holding or trading virtual currencies such as Bitcoins.

However, the most recent report goes further in calling for caution when dealing with virtual currency. These risks include fraudulent behaviour, the practice of mining, internet hacking, identity theft, problems with linking virtual currency to fiat currency and consumer loss due to price manipulation or volatility. These are just a few examples; overall, the EBA lists over 65 risks to all stakeholders who deal with virtual currencies.

‘As you were’ – EBA short-term response

The EBA goes on to propose a short-term regulatory response to the growth in virtual currency, while also suggesting a European-wide regulatory framework for the future. In the short-term, the EBA would like to see “national supervisory authorities discourage financial institutions from buying, holding or selling virtual currency, thereby ‘shielding’ regulated financial services from virtual currency”. On top of this, the EBA recommends that all anti-money laundering legislation and counter terrorist financing requirements are imposed upon virtual currency transactions at national level. This would include the current Anti-Money Laundering Directive (AMLD) and Know Your Costumer (KYC) requirements.

In summary, the EBA would like to see regulatory bodies denounce virtual currency as insecure and take a step back. In this way, they would distance themselves from any untoward practices that may take place when virtual currency is being used. However, this is not a sustainable solution and the EBA recognises this in their final recommendations.

Foundations for a long-term EU-wide regulation

Understandably, a consistent policy across Europe detailing how virtual currency should be regulated is a lot more difficult to outline. The EBA argues that virtual currency will benefit through increased consumer protection, reduced risks, more efficiency and reduced regulatory arbitrage, if a European-wide regulation developed over time. The report invited EU institutions to build on these foundations and develop common ground between all parties.

The recommendations for the long-term development of European-wide regulation strike a more upbeat tone. The EBA’s conclusions, whilst arguing for a healthy system that promotes the benefits of virtual currency, are very general in nature and place the onus on other EU institutions to push forward with more detailed policy. Where there is a more immediate concern of the risks involved with dealing in virtual currency, the EBA is quick to warn institutions of these.

First steps in an EU-wide regulation

We have seen warnings from the EBA and pronouncements from MEPs on virtual currency in the past; however, this can be considered the first report from an EU institution outlining how the development of an EU-wide virtual currency may progress. That, in itself, will move virtual currency up the list of priorities for the new EU Parliament and Commission. However, there is no pressing concern to regulate virtual currency and the EU is content to hand responsibility to EU Member States for the moment. There is a sense that the catalyst for a concrete policy proposal may only come from the mainstream adoption of virtual currency, or a one off large scale criminal or consumer protection incident, as witnessed at Mt Gox in Japan.

In the short-term, this warning from the EBA will only help to reinforce the cautious nature of banks towards virtual currency across Europe. Across the ocean, Canada has addressed the potential risks by introducing their first law regulating virtual currency, whilst several states in the US are looking to give clear guidelines on companies and individuals dealing in virtual currency. The regulation and legitimisation of virtual currency has also picked up pace further afield, including in Asia, in Hong Kong and Singapore.

The most telling and transparent note in the EBA report, was the admission that consistent regulation may take “considerable time to develop, fine-tune and implement, depending (amongst other things) on the development of the virtual currency market.” In the meantime, virtual currency will continue to grow and innovate, free from further EU regulation in the immediate future.