On Friday the 4th of July the European Banking Authority (EBA) published an opinion addressed to the EU Council, European Commission and European Parliament outlining its view on how ‘virtual currencies‘ should be regulated. The opinion is also addressed to national supervisory authorities, advising them to avert financial institutions from investing or dealing in virtual currencies until the appropriate regulatory regime is implemented.
The opinion represents the fruits of the EBA’s consultations with other European authorities such as the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA) over the past months. Whilst the EBA acknowledges that virtual currencies do offer various potential benefits such as faster and cheaper transactions, it also outlined over 70 risks across several categories, including risks for users, market participants, risks related to financial integrity, such as money laundering and other financial crimes.
On the basis of this assessment, the EBA has taken the view that any regulatory regime must adequately address each of these risks, which will involve a significant volume of new regulation. Amongst the specific matters that would need to be addressed are matters such as governance requirements for several market participants, segregation of client accounts, capital requirements and, most importantly, the creation of ‘scheme governing authorities’ accountable for overseeing the integrity of a particular virtual currency scheme and its key components, including its protocol and transaction ledger.
In view of the fact that no such regime is currently in place the EBA has issued a clear warning to national supervisory authorities to discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies.
The EBA has the task, amongst others, 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. The EBA began evaluating ‘virtual currencies’ in 2013 and issued a public warning on 13 December 2013 to make consumers aware that virtual currencies are not regulated and that risks, as a result, are unmitigated.
In the conclusion of its opinion, the EBA proposes a regulatory regime intended to ensure that virtual currency providers are provided with access to the internal market regardless of the Member State in which they are established. The EBA recognises the advantage of action being taken at EU level in order to achieve a consistent level of regulation, thereby mitigating risks for all market participants throughout the Union. The alternative of allowing each Member State to regulate alone would lead to a fragmented and un-co-ordinated regulatory landscape and the probable consequence of varying consumer protection measures.
With the issuing of this opinion, the proverbial ball now sits squarely in the court of the European Parliament, Council and Commission to pick things up and identify the way forward to begin implementing the appropriate regulatory framework on the basis of the EBA’s opinion. EBA’s full opinion can be found here