Financial Services Regulation |  Dec 18, 2013

Virtual Currencies – EBA warns consumers

On 13th December 2013, the European Banking Authority (EBA) issued a warning on a series of risks deriving from buying, holding or trading virtual currencies such as Bitcoins. The EBA said that consumers are not protected through regulation when using virtual currencies as a means of payment and may be at risk of losing their money. Furthermore, there is no guarantee that currency values remain stable. The Authority is currently assessing further all relevant aspects associated with virtual currencies, in order to identify whether virtual currencies can and should be regulated and supervised.

Consumers should be aware that exchange platforms tend to be unregulated and are not banks that hold their virtual currency as a deposit. Currently, no specific regulatory protections exist in the EU that would protect consumers from financial losses if a platform that exchanges or holds virtual currencies fails or goes out of business. ‘Digital wallets’ containing consumers’ virtual currency stored on computers, laptops or smart phones, are not impervious to hackers and there have been cases in which  consumers lost significant amounts of virtual currency, with little prospect of having it returned. Also, when using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law.

EBA also pointed out that as transactions in virtual currency provide a high degree of anonymity, they may be misused for criminal activities, including money laundering. This misuse could lead law enforcement agencies to close exchange platforms at short notice and prevent consumers from accessing or retrieving any funds that the platforms may be holding for them. In addition, holding virtual currencies may have tax implications, and consumers should make sure that they give due consideration to whether tax liabilities apply in their country when using virtual currencies.

Finally, the EBA recommended that, if consumers  buy virtual currencies,  they should fully understand their specific characteristics and not use ‘real’ money that they cannot afford to lose.

GVZH Advocates is a leading Maltese law firm actively involved in financial services and technology law. If you wish to get in touch with the author, please send an e-mail here.

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