(Updates with risks in fifth paragraph.)
July 4 (Bloomberg) -- European Union banks should shun virtual currencies such as Bitcoin until rules to prevent abuses are put in place, according to the bloc’s top banking regulator.
The European Banking Authority called on the EU to develop safeguards for trading platforms and start groups to oversee each internet currency to ensure that no individual can manipulate “the integrity of a particular virtual currency scheme and its key components,” according to a statement today. Meantime, banks shouldn’t buy, hold or sell virtual currencies.
Virtual currencies have come under increased scrutiny from regulators and prosecutors around the globe. Mt. Gox, once the world’s biggest Bitcoin exchange, filed for bankruptcy in Japan earlier this year amid claims it lost 850,000 Bitcoins. China’s central bank barred financial firms from handling virtual currency transactions last year.
“Regulators have become alert to the potential for fraud and disruption,” Richard Reid, a research fellow for finance and regulation at the University of Dundee, Scotland, said by e- mail. “Such attention from regulators is bound to curb the growth of markets such as Bitcoin.”
The European watchdog identified more than 70 risks linked to the currencies. They include fraud by exchanges, sudden drops in value due to exchange-rate fluctuations, losses caused by changes to software protocols underpinning the currency, identity theft, and the risk that a trading platform could be hacked, according to the EBA.
Widespread use of the currencies could also make it harder for central banks to steer the economy by making the effects of monetary policy harder to predict, the EBA said.
“The EBA is of the view that a regulatory approach to addressing the risks it has identified would require a substantial body of regulation, some components of which would need to be developed in more detail,” the regulator said. The EU should consider extending the scope of anti-money laundering law to better cover virtual currencies, according to the EBA.
Bitcoins emerged in 2009 out of a paper authored under the pseudonym Satoshi Nakamoto. Since then, retailers selling items from Gummi Bears to luxury homes have started accepting Bitcoins, and new companies have begun offering ways to ease its use as a payment system.
Bitcoin gained credibility after law enforcement and securities agencies said in U.S. Senate hearings that it could be a legitimate means of exchange. The price of Bitcoins topped $1,000 as speculators anticipated broader use of digital money.
The price has since dropped to about $627 on Bitstamp, an online exchange based in Slovenia. It would cost around $8.4 billion to buy all the Bitcoins in existence, according to Bitstamp.
The EBA’s announcement is “not very helpful” and may only deter individual users of virtual currencies, according to Simon Dixon, a director of the U.K. Digital Currency Association, a group representing the British virtual currency industry.
“Banks are not engaging with digital currencies yet as it is a person-to-person network that operates outside of banking,” he said by e-mail. “The more likely result of the announcement is to scare people from using digital currencies rather than banks.”
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--With assistance from Olga Kharif in Portland.