Could Bitcoin make it big in Europe? Whilst the Euro teeters on the brink of obscurity, the authorities assess Bitcoin’s future

The European Banking Authority (EBA) has issued a study, making its detailed perspective relating to digital currencies such as Bitcoin very clear.

Following the US authorities’ interest in Bitcoin, specifically New York Financial Services Superintendent Benjamin Lawsky, who introduced the BitLicense regulatory framework for Bitcoin-related market participants, the pan-European banking organization has been investigating how it should manage the flow of virtual currencies across its jurisdiction.

This report by the European Banking Authority could not come at a more poignant time, with the Euro declining in value, and European Central Bank President Mario Draghi having committed 60 billion Euros a month to asset buying until late 2016, as well as Greece’s future as a member of the EU looking increasingly uncertain, under unserviceable debt which equates to more than a third of the ECB’s capitalization, is unwilling to make attempts to settle.

According to the European Banking Authority’s report, 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 virtual currency are not regulated and that the risks are unmitigated as a result.

The question that remained unaddressed at the time was whether virtual currencies 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.

virtual currencies 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 virtual currencies, 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 virtual currency scheme can be created, and then its function subsequently changed, by anyone, and in the case of decentralized schemes, such as Bitcoins, by anyone with a sufficient share of computational power; that payer and payee can remain anonymous; that virtual currency 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 virtual currency 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 virtual currencies.

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 virtual currency schemes, and will mitigate those risks that arise from the interaction between virtual currency schemes and regulated financial services. It would not mitigate those risks that arise within, or between, virtual currency schemes themselves.

Other things being equal, this immediate response will allow virtual currency 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 virtual currencies.


One of the tasks of the EBA, in accordance with Article 9 of its founding regulation, 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 in regulatory practice.

In September 2013, virtual currencies (VCs) emerged as one of the many innovations the EBA was monitoring at the time. VCs are a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a FC, but is accepted by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically.

In their decentralised variant, VC schemes tend to be created online using powerful computer hardware, which allows users to ‘mine’ small amounts of the currency by solving deliberately complex algorithms. The increase in the supply of VC units in the decentralised VC schemes that exist is said to be fixed by a mathematical protocol. Only small amounts are released over time, and the computing power required to mine a unit increases over that time. Miners validate VC transactions and tend to operate anonymously, from anywhere in the world.

The Payments Conundrum

At present, the size of all VC schemes is difficult to gauge, due to the uncertain reliability of the data sources. It is also unknown how many VC transactions are carried out, not as a means of payment but as a mere exchange between VC and FC. Using a generous interpretation, the number of global VC transactions has never exceeded 100 000 per day across the globe, compared to approximately 295 million conventional payment and terminal transactions per day in Europe alone (i.e. credit transfers, direct debits, e-money transfers, cheques, etc.).

In autumn 2013, however, the EBA noticed increased VC activity across EU Member States, with a growing number of VC schemes being launched, an increasing number of merchants, and a rising number of individuals using VCs, and Bitcoins in particular, not only as an investment but as a means of paying for goods and services. Market participants were apparently drawn to VCs because of the benefits of being able to transfer VC units peer-topeer without the need for an intermediary. Given that the regulation of payment services and relevant EU directives – such as the Payment Services Directive (PSD) and the Electronic Money Directive (EMD) – fall into the EBA’s scope of action, the EBA began assessing the phenomenon.

The e-wallet Security Risk – EBA considers MtGox to have been mismanaged

Following three months of analysis of the potential risks to individuals arising from using VCs, the EBA issued a public warning on 13 December 2013, making consumers aware that they may lose their money on an exchange, that their VC units may be stolen from their digital wallets, that they are not protected when using VCs as a means of payment, that the value of VCs has been very volatile, that transactions in VCs may be misused for criminal activities and that individuals holding VCs may be subject to unforeseen tax liabilities.

The EBA is very much aware and mindful of the seriousness of MtGox’s demise, citing the reason for the loss of 750,000 bitcoins as being down to mismanagement, cyber-attacks and theft of a substantial amount of Bitcoins. As the most popular VC scheme at the time, the value of Bitcoins fluctuated wildly, and several jurisdictions changed the tax status of VCs.

However, VC schemes tend to have properties that are very similar to those provided by conventional payment service providers, as regulated and supervised by the EBA and the national supervisory authorities across the 28 EU Member States. The question yet to be addressed was whether VCs therefore should, or could be regulated.

The question was given further impetus because a few national jurisdictions, within the EU as well as beyond, began to take national approaches that deviated from one another. Some jurisdictions considered imposing requirements on specific VC market participants as specified in existing legislation or regulations, while others created new licensing requirements. Others still decided to ban financial institutions from interacting with VCs.

How can the EU regulate Bitcoin?

To find a solution to the issue of whether VCs can and ought to be regulated, the EBA carried out additional analysis during the first half of 2014, the results of which are presented in this EBA Opinion. The first chapter specifies a definition of VCs and identifies the main actors participating in the markets for VCs, such as users, exchanges, trade platforms, inventors, ewallet providers and others. This is followed by a chapter specifying the potential benefits, such as transaction costs, transaction speed and financial inclusion outside of the EU.

The report continues by identifying the main risks arising from VCs, separated into risks arising to individuals, to other market participants, to financial integrity, to existing payment systems in conventional FCs, and to regulatory authorities. Each of the 70+ risks identified is tentatively prioritised based on indicative judgements of the probability of their materialisation and the impact of this materialisation. The causal divers are also identified for each risk, as these will indicate the regulatory measures that would be required to mitigate the risk drivers.

The final chapter concludes by proposing an immediate regulatory response as well as a potential response for the long term, including a full definition of what constitutes a Bitcoin exchange, and a close look at potential benefits of allowing the full, continent-wide use of virtual currencies across those exchanges.

For the official document from the EBA, click here.


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