European Banking Authority Outlines Potential Regulatory Regime for Digital Currencies

The European Banking Authority (EBA) has issued a statement today, outlining its opinion addressed to the EU Council, the European Commission and the European Parliament and providing its assessment on the conditions under which ‘virtual currencies’ should be regulated. The issued opinion, advises the above mentioned institutions to discourage financial institutions from buying, holding or selling digital currencies until a regulatory framework is in place.

The assessment has been conducted in conjunction with the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA). While potential benefits from virtual currencies were identified relating to faster and cheaper transactions, and financial inclusion, according to the opinion, risks are outweighing the benefits.

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The causes for the risks include the ease of creation of a virtual currency scheme, which can be created anonymously by anyone with a sufficient share of computational power. The EBA has also stated that miners of digital currencies who are supposed to validate transactions, payers and payees can also remain anonymous.

Unsurprisingly one of the biggest perks of the digital currency movement is one of the most important risks in the eyes of European authorities. The discouragement of financial institutions to deal with digital currencies is mostly targeting the time until there is no substantial body of regulation, which would require a lot of time to get developed, especially having in mind the pace of decision making at the European level.

According to the statement by the EBA, “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.”