* Watchdog advice to banks pending possible rules
* EU executive says will move quickly to consider regulation
(Adds reaction from European Commission)
By Huw Jones
LONDON, July 4 Banks in the European Union
should refrain from offering customer accounts in virtual
currencies like bitcoins until regulatory safeguards are in
place, the bloc's banking watchdog said on Friday.
The EU's executive European Commission responded by saying
it was imperative to look quickly at possible regulation.
Bitcoin, the best known of the 200 or so computer-generated
currencies, started circulating in 2009, and acceptance has been
growing as more merchants allow customers to pay for goods and
services in the currency.
Virtual currencies, which unlike conventional money are not
backed by a central bank or government, have come under
particular scrutiny since Tokyo-based exchange Mt. Gox went
bankrupt in February after losing an estimated $650 million
worth of customer bitcoins.
The European Banking Authority (EBA) in a study published on
Friday proposed a new regulatory framework along with advice to
banks to steer clear of virtual currencies until rules are in
"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," the EBA said.
So far there has been no coordinated, global approach to
regulating virtual currencies, making the EBA plans the first
comprehensive blueprint. No country has yet given virtual
currencies legal tender status.
The advice to banks would still allow financial firms to
maintain a current or checking account relationship with
businesses active in virtual currencies, it added.
Among the new rules it wants to see in place is a
requirement for the currency exchanges to hold capital so that
if they go bust, as in the case of Mt. Gox, there are resources
to cushion customers.
The EBA study identifies more than 70 risks to users, market
participants and to the financial system, such as
money-laundering and other financial crimes, from the spread of
virtual currencies in an unregulated market.
TOO SERIOUS TO IGNORE
The watchdog is particularly alarmed at how a group of
so-called miners - who unlock new bitcoins online - have taken
control of the currency, allowing them to block transactions if
they want to.
The EBA said rules are needed so that when a virtual
currency scheme is created, it cannot be changed at a whim just
because someone has enough computer power.
It is also concerned that miners, payers and payees can
remain anonymous, while IT security cannot be guaranteed and the
financial viability of some market participants remains
Rules were also needed on how virtual currencies are
operated, ensure customer money is kept separate, and require
the setting up of bodies that are accountable for each virtual
currency, the EBA said.
"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," the watchdog said.
EBA said daily transactions in virtual currencies had never
exceeded 100,000 globally, compared with 295 million
conventional payments a day in Europe alone.
It will be up to the EU's executive body, the European
Commission, to propose draft rules that would need approval from
the bloc's member states and European Parliament.
Chantal Hughes, spokeswoman for the bloc's financial
services chief Michel Barnier, said the executive would now
consider regulating the sector, especially to address risks of
"It is imperative to move quickly on this issue. The
potential for money laundering and terrorist financing is too
serious to ignore," Hughes said.
Banking regulators from all 28 EU states have approved the
(Editing by Foo Yun Chee and David Holmes)