Virtual Currencies Unregulated But Not Threatening, ECB Says

The European Central Bank has decided that virtual currencies are gaining traction in the continent and decided to dedicate an analysis report to them. The report aims to provide “the basis for discussion on virtual currency schemes” and as such defines virtual currencies and exposes the main schemes. The bank defines a virtual currency as a “type of unregulated, digital money which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”

The ECB observed that these currencies tend to be unstable and are not regulated, supervised or overseen by any public authority and are mainly maintained by its users. Their kind changes depending on the relation they have with the real economy. The two case studies used for this report were Bitcoin and Second Life’s virtual currency scheme.

After an initial analysis of the virtual currencies, the ECB concluded that these schemes do not present a risk for price or financial stability, as long as their use continues to be limited and mostly disconnected to the “real economy”. However the bank did show concern for the potential of illegal activities helped by these currencies. The case of Bitcoin particularly showed great risk as the schemes guarantees absolute anonymity for its users.

The bank also showed concern for the challenge virtual currencies can present to public authorities and the negative impact they can have on the reputation of central banks – “assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly”. Finally the ECB concluded that virtual currencies fall under the responsibility of central banks, “as a result of characteristics shared with payment systems”. As such, the bank recommends a further assessment and examination as these currencies develop.

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