The growth of virtual currency schemes such as Bitcoin and Second Life's Linden Dollars, could have a negative reputational impact on central banks due to their inherent instability, warns the European Central Bank.
In a preliminary impact assessment of the proliferation of virtual currency schemes, the ECB notes that while most such schemes are too small to jeopardise price or financial stability, they do represent a challenge to public authorities due to the legal uncertainty surrounding their status and their adoption by criminals and money launderers.
Lack of overarching regulation is a key theme picked up by the ECB, which expresses concern about the level of credit, liquidity, operational and legal risks imposed upon users.
The ECB argues that schemes like Bitcoin and Linden Dollars "do indeed fall within central banke' responsibility" as a result of characteristics shared with payment systems.
In particular, the ECB is worried that the growth of such schemes could have a negative impact on the reputation of central banks.
"In the event that an incident attracts press coverage...the public may perceive the incident as being caused, in part, by a central bank not doing its job properly<" states the report.
The ECB recommends that regulators pay closer attention to ongoing developments in technology innovation and currency creation to anticipate future threats.
"Owing to the small size of virtual currency schemes, these risks do not affect anyone other than users of the schemes," the report concludes. "This assessment could change if usage increases significantly, for example if it were boosted by innovations which are currently being developed or offered. As a consequence, it is recommended that developments are regularly examined in order to reassess the risks."
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