Banks in the European Union should stop offering customer accounts in virtual currencies like bitcoins until regulatory safeguards are in place. That is the view of the European Banking Authority.

The watchdog organisation is proposing a new framework of rules and has advised banks to steer clear of virtual currencies until those rules are in place.

“This immediate response will ‘shield’ regulated financial services from virtual currency schemes, and will mitigate those risks that arise from the interaction between virtual currency schemes and regulated financial services,” the EBA said.

The planned regulations include a requirement for currency exchanges to hold reserves of cash so that if they go bankrupt – as happened with Japanese based exchange Mt. Gox – customers can be compensated.

Risks

The EBA study identifies more than 70 risks to users, market participants and to the financial system such as money-laundering and other financial crimes from using virtual currencies in an unregulated market.

The watchdog is particularly alarmed at how a group of so-called miners – who unlock new bitcoins online – have taken control of the currency, allowing them to block transactions if they want to.

The EBA said rules are needed so that when a virtual currency scheme is created, it cannot be changed at a whim just because someone has enough computer power.

It is also concerned that miners, payers and payees can remain anonymous, while IT security cannot be guaranteed and the financial viability of some market participants remains uncertain.

Rules were also needed on how virtual currencies are operated, ensure that customer money is kept separate, and require the setting up of bodies that are accountable for each virtual currency, the EBA said.

with Reuters