The EU takes steps towards the regulation of digital currencies


With digital currencies gaining ground the need for the regulation of the field is becoming increasingly evident. In all the EU member states however, this is a matter that needs to be decided upon collectively and thus authorities in each jurisdiction have repeatedly asked for guidance from EU bodies. It appears that things have started moving towards the right direction since European Banking Authority (EBA) published on 4th July an opinion addressed to the EU Council, European Commission and European Parliament in which it presents its views on the matter of how ‘virtual currencies’ should be regulated. This document also contains advice addressed to the national supervisory authorities, suggesting that they should avert financial institutions from investing or dealing in virtual currencies until the appropriate regulatory regime is implemented on a pan-European level.

Over the past few months the EBA has held consultations with other European authorities such as the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA) on the issue of virtual currencies and the conclusions derived from these consultations are presented in this opinion. While acknowledging the various potential benefits that could be offered by digital currencies, such as faster and cheaper transactions, EBA also highlights in its opinion over 70 risks associated with digital currency use, including risks for users and market participants, as well as risks related to financial integrity, such as money laundering and other financial crimes.

Having identified the many risks, EBA points out that they need to be addressed through the regulatory system and that such a task requires a significant volume of new regulation to be enacted in order to deal with matters such as governance requirements for several market participants, segregation of client accounts and capital requirements. However, what is perceived as most important by EBA is the need to create “scheme governing authorities,” which will be accountable for overseeing the integrity of each particular virtual currency scheme as well as its key components, including the protocol and transaction ledger.

Due to the current absence of such a regime, the EBA sent a warning to the national supervisory authorities in the various EU member-states advising them to discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies.

Within the framework of its mandate, which includes the adoption of guidelines and recommendations aiming to promote the safety and soundness of markets and the convergence of regulatory practice the EBA began its efforts towards the evaluation of virtual currencies in 2013 and in December of the same year it issued a public warning making consumers aware that virtual currencies are not regulated and that risks, as a result, are unmitigated.

As a conclusion to 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 also 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. According to EBA’s view the alternative of allowing each Member State to regulate virtual currencies on its own would lead to a fragmented and uncoordinated regulatory landscape resulting in varying consumer protection measures and levels.

It is anticipated that on the basis of EBA’s opinion the pertinent EU bodies, i.e. the European Parliament, the Council and the Commission will now pick up their pace and proceed with the  implementation of the appropriate regulatory framework for virtual currencies.

Optimism for virtual currency proponent was also fuelled recently by the announcement that the world’s first regulator-approved Bitcoin investment fund has been launched by Global Advisors, a Jersey-based investment management company. The establishment of the Jersey-regulated open-ended Global Advisors Bitcoin Investment Fund (GABI) has been hailed as a significant step forward, reflecting the changing face of investment and paving the way for other similar moves to follow suit in the future.