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The Resource for the Global Finance Profession

Bitcoin Breakdown: EU Banks Told to Back Off Bitcoin

  • By Andrew Deichler
  • Published: 2014-07-08

As bitcoins and other virtual currencies continue to gain more attention, AFP will provide updates on the latest news surrounding these new forms of payment.

EU Banks Told to Back Off Bitcoin as Regulation Looms

The European Banking Authority (EBA) urged banks last week to refrain from dealing in bitcoin and other virtual currencies until regulations are in place. In an opinion paper sent to the EU Council, European Commission and European Parliament, the regulator listed the requirements that it believes are essential to regulate the currencies.

While the EBA acknowledged that there are benefits to virtual currencies, such as faster and cheaper transactions, it said it has identified more than 70 risks surrounding them, including money laundering and other financial crimes. Much of the risks stem from the fact that virtual currencies can be created by anyone, anonymously, the regulator said. Additionally, bitcoin “miners,” as well as payers and payees, can also remain anonymous, creating further risks.

Based on its assessment, the EBA is advocating a “substantial body of regulation” for virtual currencies. “In particular, a regulatory approach would need to cover governance requirements for several market participants, the segregation of client accounts, capital requirements and, most importantly, the creation of ‘scheme governing authorities’ accountable for the integrity of a particular virtual currency scheme and its key components, including its protocol and transaction ledger,” the EBA said.

Since no regime is currently in place, the EBA is advising national supervisory authorities to discourage banks from buying, holding or selling virtual currencies. This approach “will allow virtual currencies schemes to develop outside the financial services sector and will also allow financial institutions to maintain a current account relationship with businesses active in the field of virtual currencies,” the EBA said.

Following the EBA’s announcement, the European Commission indicated that it would work to impose rules on virtual currencies. Chantal Hughes, a spokeswoman for Financial Services Commissioner Michel Barnier, told Bloomberg that it is imperative for the Commission to move quickly on the issue. “The potential for money laundering and terrorist financing is too serious to ignore,” she said.

The UK Digital Currency Association (UKDCA) also responded to the EBA’s proposal. The group, which promotes the use and development of virtual currencies in the UK, said it is not aware of any banks that hold, accept or transact with any virtual currencies, or offer banking services to virtual currency businesses and service providers.
The UKDCA added that it welcomes the opportunity to engage with the EBA and help establish a framework that would mitigate risks to participants.

In an email to Bloomberg, Simon Dixon, a director of the UKDCA, elaborated further, indicated that the EBA's proposal could stifle the use of virtual currencies in the EU. “Banks are not engaging with digital currencies yet as it is a person-to-person network that operates outside of banking,” he wrote. “The more likely result of the announcement is to scare people from using digital currencies rather than banks.” 

Virtual Currencies Now Legal in California

California Governor Jerry Brown has signed a bill that recognizes the legal use of bitcoin and other virtual currencies in the state.

Introduced by Assemblyman Roger Dickinson (D-Sacramento) in January, AB-129 repealed Section 107 of California’s Corporation Code, which prohibited businesses and individuals from issuing money other than U.S. dollars. Proponents of the bill argued that the law was out-of-date and could prevent the use of common business practices like retailer rewards programs.

“Existing law prohibits a corporation, flexible purpose corporation, association, or individual from issuing or putting in circulation, as money, anything but the lawful money of the United States,” the bill reads.

Though Section 107 was generally not enforced, it still rendered virtual currencies illegal in California.

“I commend Governor Brown for signing AB 129, a bill which repeals the obsolete prohibition of alternative currencies,” Dickinson said. “Alternative currencies, from Starbucks Stars to Amazon Coins, are becoming increasingly common and prior to AB 129, these currencies were in violation of the law.”

The announcement bodes well for California retailers that have been clamoring to accept bitcoin. Newegg, an online software retailer based in the City of Industry, said in a statement that its customers have been asking for the option to pay in bitcoin for months. “We believe there is a pent-up demand just waiting to be served and we are happy to open this payment option to them,” said Soren Mills, chief marketing officer of Newegg North America.

Venture Capitalist Claims Silk Road Bitcoins in Auction

A single bidder won nearly 30,000 bitcoins, valued at about $18 million, at a U.S. Marshals auction. The bitcoins were seized from the infamous Silk Road underground marketplace after it was shut down by the FBI last year.

The Marshal Service declined to identify the winner. But an emailed statement by Vaurum, a Palo-Alto, Calif-based bitcoin trading platform, revealed it to be venture capitalist Tim Draper.

“With the help of Vaurum and this newly purchased bitcoin, we expect to be able to create new services that can provide liquidity and confidence to markets that have been hamstrung by weak currencies,” Draper, said in the statement.

Draper added that “no one is totally secure” in holding fiat currencies. “We want to enable people to hold and trade bitcoin to secure themselves against weakening currencies,” he said.

Vaurum CEO Avish Bhama said that his company would be using the 30,000 bitcoins to target emerging markets. “It’s still quite difficult to get access to bitcoin in these developing economies—and that’s exactly where it is needed the most,” he said. “Our goal is to build reliable infrastructure and increase liquidity, which are two major challenges in the ecosystem.”

Japan Throws in the Towel on Bitcoin Regulation

The Liberal Democratic Party (LDP), Japan’s ruling current ruling power, has decided not to regulate Bitcoin for the moment.

Japan’s decision is a curious one, considering that much of the recent controversy surrounding Bitcoin stems from the collapse of the once-dominant exchange Mt. Gox—which was based in Tokyo. Mt. Gox said in February that it had lost all of its bitcoins due to cyberattacks that had apparently been going on for years.

The Mt. Gox collapse prompted Japanese authorities to hold talks over whether bitcoin needed to be regulated, though they ultimately decided against it. “Basically, we concluded that we will, for now, avoid a move towards legal regulation,” said Takuya Hirai, an LDP lawmaker, told Reuters.
Hirai added, however, that a final decision on regulation would be made after hearing more opinions on the subject.

Copyright © 2015 Association for Financial Professionals, Inc.
All rights reserved.

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