The EBA issued the document, which was sent to the EU council, European Commission and European Parliament. The paper included the new requirements for the regulation of cryptocurrencies and also instructed financial institutions not to buy, hold or sell digital currencies until new regulations are placed. Moreover, earlier this year, the ECB pointed out that bitcoin should not be ignored or dismissed, however it also mentioned that it faces substantial risks.
At the same time, the EBA specifies the number of benefits that can be taken out from digital currencies, such as cheaper and faster transactions, as well as more financial inclusion. However, the EBA believes the risks outweigh the benefits, which are “less pronounced” in the EU. While mentioning the benefits of cryptocurrency, the EBA also found over 70 risks across several categories. The EBA identified the principle risk: digital currencies is still decentralised and as a matter of fact they can be created and changed by anyone, anonymously. The EBA believes miners are a threat, since they can remain anonymous and IT security is under a big question.
As a result, the EBA believes:
“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.”
Aware that the regulatory framework cannot be changed on short notice, the EBA take under control the current issue and 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 rules are 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 specifies.
The EBA adds: “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 Bitcoin Foundation announced today that the company rejected the EBA’s recommendations that financial institutions should stop trading in digital currencies. The Foundation backed up their decision by saying that it would result in a “significant cost” to Europeans.
The foundation’s Global Policy Counsel, Jim Harper, stated:
“Europe’s states and people are figuring out for themselves how to get the benefits of Bitcoin while controlling the costs. They may not listen to the European Banking Authority.”