July 4 (Bloomberg) -- The European Commission signaled it will try to impose rules on virtual currencies such as Bitcoin after the bloc’s banking regulator ordered lenders to shun them.
“It’s imperative to move quickly on this issue,” Chantal Hughes, a spokeswoman for Financial Services Commissioner Michel Barnier, said by e-mail today. “The potential for money laundering and terrorist financing is too serious to ignore.”
The Commission, the EU’s executive arm, moved after the European Banking Authority said banks shouldn’t buy, hold or sell virtual currencies until regulators develop safeguards to protect their integrity. The watchdog identified more than 70 risks linked to the currencies ranging from identity theft to the possibility hackers could target a trading platform.
Virtual currencies have come under increased scrutiny from regulators and prosecutors around the globe. Mt. Gox, once the world’s biggest Bitcoin exchange, filed for bankruptcy in Japan earlier this year amid claims it lost 850,000 Bitcoins. China’s central bank barred financial firms from handling virtual currency transactions last year.
“Regulators have become alert to the potential for fraud and disruption,” Richard Reid, a research fellow for finance and regulation at the University of Dundee, Scotland, said by e-mail. “Such attention from regulators is bound to curb the growth of markets such as Bitcoin.”
The EBA called on the EU to devise rules for trading platforms and start groups to oversee each internet currency to ensure that no individual can manipulate a currency. The EU should consider extending the scope of anti-money laundering law to better cover virtual currencies, according to the EBA.
“The EBA is of the view that a regulatory approach to addressing the risks it has identified would require a substantial body of regulation,” the regulator warned.
Widespread use of the currencies could also make it harder for central banks to steer the economy by making the effects of monetary policy harder to predict, the EBA noted.
Bitcoins emerged in 2009 out of a paper authored under the pseudonym Satoshi Nakamoto. Since then, retailers selling items from Gummi Bears to luxury homes have started accepting Bitcoins, and new companies have begun offering ways to ease its use as a payment system.
The currency gained credibility after law enforcement and securities agencies said in U.S. Senate hearings that it could be a legitimate means of exchange. The price of Bitcoins topped $1,000 as speculators anticipated broader use of digital money.
The price has since dropped to about $629.98, including a 1.8 percent decline today, on Bitstamp, an online exchange based in Slovenia.
The EBA’s announcement is “not very helpful” and may only deter individual users of virtual currencies, according to Simon Dixon, a director of the U.K. Digital Currency Association, a group representing the country’s virtual currency industry.
“Banks are not engaging with digital currencies yet as it is a person-to-person network that operates outside of banking,” he said by e-mail. “The more likely result of the announcement is to scare people from using digital currencies rather than banks.”
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