Bitcoin: If it keeps moving, regulate it

Bitcoin: If it keeps moving, regulate it

IBS recently noted the reluctance of existing banks, suppliers and regulators to engage with bitcoin and other virtual currencies (VC), but at least it hasn’t suffered the same fate of the Liberty Dollar in the US, which was stamped on by the FBI in 2007. Its computers were seized, its currency, backed by $7 million in gold and silver, was confiscated and its founder was eventually found guilty of ‘making, possessing and selling his own currency’. 

Bitcoin is altogether harder to stamp out, as it is not backed by anything solid, is not in any one jurisdiction and exists online only. It may not therefore be as overt a threat as the Liberty Dollar (which was set up by an entity once called the National Organization for the Repeal of the Federal Reserve and the Internal Revenue Code) but it also reflects the changing nature of technology.   

The European Banking Authority (EBA) has now weighed in, concluding that authorities should tell the industry not to trade in virtual currencies. It had already warned consumers that virtual currencies are unregulated.

The EBA has managed to find 70 risks with the use of virtual currencies. They range from ‘user loses VC units when exchange gets hacked’ to ‘should VCs gain widespread acceptance, central bank as issuer of fiat currency can no longer steer the economy, as the impact of its monetary measures become difficult to predict’.  

Bitcoin machines, Helsinki

It also adds that ‘while there are some potential benefits of VCs, for example, reduced transaction costs, faster transaction speed and financial inclusion, these benefits are less relevant in the European Union, due to the existing and pending EU regulations and directives that are explicitly aimed at faster transactions speeds and costs and at increasing financial inclusion’.

To summarise, its message is to stop using VCs until they have all the same protections and regulations as the Euro, which isn’t that bad anyway and which thanks to its enlightened regulators is addressing the concerns of bitcoin users.

However, the very attraction of VCs is that they do not behave like the Euro. The chances are that users are instinctively aware of the ‘risks’ of VCs when they use them but prefer the devil they don’t know to the devil they do. It might just be that Europeans equate the Euro with recession, unemployment and political emasculation. Talking about the benefits or SEPA or the second Payment Services Directive misses the point.

The EBA also calls for the regulation of VCs in the long term. Indeed, regulation has already started. Canada has added virtual currencies to its body of anti-money laundering regulation, adding on the first of an endless number of costs to VC transactions.

The chances are that so long as they remain out of control of governments in terms of their issuance, there will still be benefits of VCs as stores of value, just as there is with gold. But the existing banking industry will throw as many obstacles in the way as it can.