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European Banking Authority to consider Bitcoin regulation

By Dean Carroll

In a sign of the increased influence of Bitcoin, the European Banking Authority has released a warning to cosumers on the perils of virtual currencies and revealed that it may consider regulating the new form of digital money. Addressing the potential downsides of buying, holding or trading alternative currencies, the EBA said: “You need to be aware of the risks associated with virtual currencies, including losing your money. No specific regulatory protections exist that would cover you for losses if a platform that exchanges or holds your virtual currencies fails or goes out of business.”

The London-based body also revealed that it was carrying out an assessment to look at the possibility of regulating virtual currencies in the future, a message sure to send shockwaves through the Bitcoin community where traders were originally attracted due to the freedom from government control. Bitcoin is a form of digital money, developed originally by hackers, that was not issued or guaranteed by a central bank and that can act as means of payment.

It can be used to pay for items online in computer games, social networks and through ‘dark net’ websites like the infamous and now defunct Silk Road. However, it has become increasingly possible to use virtual currencies as a means to pay for goods and services with retailers, restaurants and entertainment venues. These transactions often did not incur any fees or charges, and did not involve a bank.

“More recently, the virtual currency Bitcoin has set the scene for a new generation of decentralised, peer-to-peer virtual currencies – often also referred to as crypto currencies,” said the EBA when issuing what was only its second ever warning notice. “Following the currency’s recent growth, dozens of other virtual currencies have followed in Bitcoin’s wake.

“Bitcoins are created online using computer-intensive software known as ‘miners’. This software allows consumers to mine small amounts of the currency through solving deliberately complex algorithms. However, the increase in the money supply is fixed so only small amounts are released over time.”

Outlining the supposed pitfalls when using virtual currencies, the EBA continued: “In order to purchase virtual currencies, you may buy currency directly from someone who owns them or through an exchange platform. These platforms tend to be unregulated. In a number of cases, exchange platforms have gone out of business or have failed – in some instances due to hacking by third parties. We are aware of consumers permanently losing significant amounts of money held on these platforms.

“You should be aware of the fact that exchange platforms are not banks that hold their virtual currency as a deposit. If an exchange platform loses any money or fails, there is no specific legal protection – for example through a deposit guarantee scheme – that covers you for losses arising from any funds you may have held on the exchange platform, even when the exchange is registered with a national authority.

“Once you have bought virtual currency it is stored in a ‘digital wallet’ on a computer, laptop or smart phone. Digital wallets have a public key, and a private key or password that allows you to access them. However, digital wallets are not impervious to hackers. Similar to conventional wallets, money may therefore be stolen from your wallet. Cases have been reported of consumers losing virtual currency in excess of $1m with little prospect of having it returned. In addition, if you lose the key or password to your digital wallet, your virtual currency may be lost forever. There are no central agencies that record passwords or issue replacement ones.

“When using virtual currencies as a means to pay for goods and services you are not protected by any refund rights under EU law offered, for example, for transfers from a conventional bank or other payment account. Unauthorised or incorrect debits from digital wallet can therefore not usually be reversed. Acceptance of virtual currencies by retailers is also not permanently guaranteed and is based on their discretion and/or contractual agreements, which may cease at any point and with no notice period.”

And warning that digital money could be easily exposed to a catastrophic markets crash, the EBA report stated: “The price of Bitcoins and other virtual currencies has risen sharply. This has prompted some consumers to choose to invest in them. However, you need to be aware that the value of virtual currencies has been very volatile and can easily go down as well as up. Should the popularity of a particular virtual currency go down, for example if another virtual currency becomes more popular, then it is quite possible for their value to drop sharply and permanently.

“The currencies’ price volatility affects you if you buy virtual currencies as a means of payment: unlike money paid into a traditional bank or payment account denominated in a fiat currency, you cannot be assured that the value of your virtual currency funds remains largely stable.”

Addressing the alleged criminality associated with Bitcoin, the EBA added: “Transactions in virtual currencies are public, but the owners and recipients of these transactions are not. Transactions are largely untraceable, and provide virtual currency consumers with a high degree of anonymity. It is therefore possible that the virtual currency network will be used for transactions associated with criminal activities, including money laundering. This misuse could affect you, as law enforcement agencies may decide to close exchange platforms and prevent you from accessing or using any funds that the platforms may be holding for you.

“You should be aware that holding virtual currencies may have tax implications, such as value added tax or capital gains tax. You should consider whether tax liabilities apply in your country when using virtual currencies. We recommend that, if you buy virtual currencies, you should be fully aware and understand their specific characteristics. You should not use ‘real’ money that you cannot afford to lose.

“You should also exercise the same caution with your digital wallet as you would do with your conventional wallet or purse. You should not keep large amounts of money in it for an extended period of time, and ensure you keep it safe and secure. You should also familiarise yourself with the ownership, business model, transparency, and public perception of the exchange platforms that you are considering using.”

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