06 Jul EBA seeks to regulate virtual currencies
In a 46-page Opinion published on Friday, Europe’s banking super-regulator, the European Banking Authority, called for the regulation of virtual currencies in the European Union.
In December 2013, the EBA issued a public warning to consumers about the risks of virtual currencies that triggered a raft of similar warnings from banking regulators around the the world. In its new Opinion, issued after a joint assessment carried out with other European authorities, the EBA proposes a two-pronged approach: a whole new body of European Union regulation governing virtual currencies that it acknowledges will take considerable time and, in the meantime, calls for immediate action by national regulators in the 28 EU member states to ‘discourage’ banks, payment and e-money institutions from buying, holding or selling virtual currencies. In effect, the EBA is advising national regulators to ban banks and other payment institutions from directly dealing with virtual currencies. Instead, it suggests virtual currencies should be allowed to develop outside the financial services sector, presumably until such time as a regulatory regime is in place.
The EBA also recommends that virtual currency gateways such as exchanges be made subject to existing anti money laundering and counter terrorist financing regimes, something that has already been enacted or proposed in other jurisdictions such as Canada and the Isle of Man.
The regulatory regime envisaged by the EBA would require governance requirements for market participants, segregation of client funds and, most controversially, the creation of what the EBA calls ‘scheme governing authorities’ to be accountable for the integrity of each virtual currency. Imagine, if you like, the Bitcoin Foundation having to be authorised as the sole governing authority on the use of Bitcoin in order for Bitcoin to be allowed to interact with existing regulated financial services. This will create a two-tier world in which regulated virtual currencies are permitted to be used in the fiat world and unregulated virtual currencies cannot.
Arguably, the EBA Opinion is the single most significant event so far in the regulation of virtual currencies. It has implications in the development of virtual currencies. It will have immediate implications for banking relationships. It will have significant cost implications and it will cause business models to be re-evaluated.