The European Banking Authority (EBA) has published an ‘opinion’ warning financial institutions to stay away from digital currencies until the industry is regulated.
In the document, which was addressed to the EU council, European Commission and European Parliament, the EBA set out new requirements for the regulation of digital currencies and also instructed financial institutions not to buy, hold or sell digital currencies until new rules are in place.
The EU banking watchdog further called for a “thorough assessment” of digital currencies carried out jointly with other European authorities, including the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA).
Earlier this year, the ECB said bitcoin should not be ignored or dismissed, but it also pointed out that it poses substantial risks.
Associated risks
The EBA notes that there are some potential benefits from digital currencies, including faster, cheaper transactions and more financial inclusion. However, the EBA believes the risks outweigh the benefits, which are “less pronounced” in the EU.
The EBA identified more than 70 risks across several categories: from risks for users, to those that could affect existing payments in conventional currencies and financial integrity.
The principle risk outlined by the EBA is the fact that digital currencies remain decentralised and they can be created and changed by anyone with enough computational power, anonymously. The EBA singled out miners as a threat, since they can remain anonymous and IT security cannot be guaranteed.
As a result, the EBA believes a “substantial body of regulation” is necessary to address these risks, saying:
“Based on this assessment, the EBA is of the view that a regulatory approach to address these risks would require a substantial body of regulation, some components of which would need to be developed in more detail. In particular, a regulatory approach would need to cover governance requirements for several market participants, the segregation of client accounts, capital requirements and, most importantly, the creation of ‘scheme governing authorities’ accountable for the integrity of a particular virtual currency scheme and its key components, including its protocol and transaction ledger.”
EBA’s immediate response
Aware that the regulatory framework cannot be changed on short notice, the EBA says it is issuing an “immediate response” to address the issue.
It is advising national supervisory authorities to “discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies” until the new regime is in place.
“While this response will mitigate risks arising from the interaction between virtual currency schemes and regulated financial services, it will not address risks arising within, or between, virtual currencies schemes themselves,” the EBA points out.
It continues: “This two-pronged approach will allow virtual currencies schemes to develop outside the financial services sector and will also allow financial institutions to maintain a current account relationship with businesses active in the field of virtual currencies.”
The recommendations are more or less in line with previous announcements and warnings from EU and national regulators, and also echo the EBA’s previous digital currency warning, issued last December. This time though, the EBA is calling for a comprehensive regulatory approach to digital currencies.
The full document
EBA Opinion on ‘virtual currencies’ by CoinDesk
EBAECBEUEuropefinancial regulationregulation
Original author: Nermin Hajdarbegovic
