11 February 2016

European Central Bank warns of virtual currency risks

30 October 2012  |  11494 views  |  6 Check close up

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."

Read the full report:» Download the document now 1.9 mb (PDF File)

Comments: (6)

Joss Wilbraham - WMG Consultants Ltd. - Oxford | 30 October, 2012, 13:06

This is a bit rich coming from the ECB! Sure there are risks associated with these new, virtual currencies but in aggregate, no more risk than from the multitude of Central Banks that seem intent on destroying the real value of the world's main currencies through a stealth tax otherwise known as inflation. The alternatives can't arrive quick enough! Let's just hope that that the same Central Banks don't regulate them out of existence in order to protect their own money printing schemes.

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
A Finextra member | 30 October, 2012, 13:34

As long as they are regulated as CBs and there is control of the currency that fits within the existing economic mechanism i can no problem However the virtual nature of this curency could encourage the very worst parts of society that would use it for criminal ends

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
James Van Dyke - Javelin Strategy and Research - Pleasanton | 30 October, 2012, 17:06

At Javelin we've published two research reports on virtual currencies, and the surprisingly sparse attention they recieved shows that the payments and banking industry is failing to look far enough ahead. Our conclusion from research of consumers combined with review of the industry triad of gaming, banking and payments found that virtual currency is surprisingly advanced for something that has escaped the spotlight. Because some virtual currencies can be converted to traditional currency right now, this represents an unregulated area with potential significant mainstream impact. Kudos to The European Central Bank for focusing on it, and here's hoping others follow their lead. 

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
Frank Mastrangelo - The Bancorp, Inc. - Wilmington | 30 October, 2012, 17:51

Gary - are you suggesting that currency regulated CBs is not utlized for criminal ends?

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
A Finextra member | 31 October, 2012, 09:08

I think there's a great danger that increased centralised oversight of these virtual currencies actually increases economic exposure by legitimising them - and the fact that these are decentralised currencies created by proprietary systems mean that there is a general (and well placed) consumer distrust of these products . As soon as they start being legitimised as regulated products, a more generalised uptake is encouraged over the risk aware niche markets which currently use them. If this happens, then the fallout of any serious currency failure or breach will be much larger, and the impact will be felt more heavily by those who do not understand the instruments.

There is a larger problem on the regulation of currencies which have no geographical base, but the main stumbling block here is the technological stability of the currency, not really it’s geographic regulation or its portability.


1 thumb up! 1 thumb up! (Log in to thumb up)
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 01 November, 2012, 10:02

My hitherto favorable views about virtual currency recently underwent a 180-degree turnaround when I switched on my B&N Nook Color a couple of days ago and found that several eBooks suddenly opened up to blank screens. In this case, a little bit of Googling followed by a hard reset solved the problem. I shudder to think what'd happen if I'm struck with a similar problem with my virtual currency. To recover some of my lost money, I'd have to first go bankrupt (equivalent of losing all content after a "hard reset") under the hope that all my money comes back. I don't know how many people will feel comfortable fooling around so much with money - certainly, I won't. Therefore, I tend to agree with @FinextraM's point about "technological stability" being a major stumbling block for the mainstream adoption of virtual currency. Before someone jumps in to point out that my entire bank balance is held by my bank electronically, it might be virtual for the bank but, as far the relationship between me and my bank is concerned, it's real money. The same is not true when I hold my money as virtual currency myself.

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
Comment on this story (membership required)
Log in to receive notifications when someone posts a comment

Finextra news in your inbox

For Finextra's free daily newsletter, breaking news flashes and weekly jobs board, sign up now.

Related blogs

Create a blog about this story (membership required)

Related stories

28 September, 2012
05 September, 2012
04 September, 2012
23 August, 2012
13 August, 2012
14 May, 2012
05 April, 2012
01 March, 2012
20 February, 2012
01 November, 2011
21 October, 2011
21 September, 2011
22 August, 2011
20 June, 2011
09 June, 2011
15 April, 2011
30 June, 2009

Related company news


Top topics

Most viewed Most shared
UK sets out open banking API framework
12395 views comments | 87 tweets | 81 linkedin
Visa opens up to developers
9182 views comments | 25 tweets | 41 linkedin
European mobile banking service Pocopay go...
7700 views comments | 24 tweets | 14 linkedin
How to accelerate your fintech startup
6733 views comments | 31 tweets | 9 linkedin
Wearable payments startup Fit Pay secures...
6361 views comments | 26 tweets | 9 linkedin

Featured job

Competitive Package
New York City, NY. USA

Find your next job