The online magazine of the Swiss Bankers Association
September 24, 2014


Virtual Currencies, bitcoins and the like: What´s up in the Virtual World?

Virtual Currencies, bitcoins and the like: What´s up in the Virtual World?

Practitioners talk about a market at risk of deadlock, central banks think about risks related to virtual currencies, and regulators work out plans to get a regulatory grip on virtual currencies. The question arises on whether pioneers within each stakeholder group on the market side should boldly move forward and have confidence that problems and challenges can be solved as they appear.

A lot has been written already on virtual currencies, the Swiss government issued a report on virtual currencies in June 2014, FINMA, the Swiss Financial Markets Regulator, issued a fact sheet on bitcoins shortly after. But a real landmark in a colourful landscape of opinions is the pinion of the European Banking Authority (EBA) on virtual currencies in general that has been issued on 4 July 2014.

Virtual Currencies: Definition of the EBA

Virtual currencies like bitcoins are a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a conventional currency, so called fiat currency (FC). However, virtual currencies are accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.

The risks of virtual currencies can´t be ignored on the providers´side.

The main actors are users, exchanges, trade platforms, inventors and e-wallet providers. For several reasons the term «currency» is misleading as it is, among others, insinuating that virtual currencies are exchangeable against other currencies, which may not necessarily be the case. However, the term is commonly used and well understood in the current context. The EBA opinion certainly parts from a regulatory prospective. However, its detailed listing of risks related to virtual currencies cannot be ignored on the provider side.

The risks of using Virtual Currencies

EBA identifies more than 70 risks across several categories such as risks to users, to non-user market participants, to financial integrity such as money laundering and other financial crime, risks to existing payment systems in conventional currencies and even risks for regulators not recognizing in a timely manner all those risks and reacting to them.

As participants remain anonymous, seizures of funds and compliance with sanctions can be avoided.

Due to the absence of intermediaries, virtual currency transactions can currently be achieved at lower costs than other means of payment, such as payment cards or bank transfers. Such transactions in virtual currency schemes are also not subject to the exchange fees applied to conversions for transactions with third countries. Transactions in virtual currencies do not require the provision of personal or sensitive data, as this is also true for transactions in cash. But that is exactly where integrity risks for virtual currency schemes come up. Participants remain anonymous, seizures of funds and even compliance with sanctions can be avoided. This makes it particularly risky for regulated financial intermediaries to participate in virtual currency schemes, for instances as places for exchange. But also the risks for users may be considerable. They may suffer losses due to delays in the recovery of virtual currency units or the freezing of virtual currency positions; they may also suffer losses due to counterparties failing to meet contractual settlement obligations etc.

Regulatory proposals for Virtual Currencies

However, if we look at the regulatory proposals EBA comes up with, one gets the impression that such regulations tending at excluding all and any risks may very well suffocate any efforts by innovative entities to move forward into an uncharted territory. It is true that consumer protection also in the area of virtual currencies requires regulatory measures, above all transparency on participants and their obligations in a virtual currency scheme. Like investors in financial products, participants in such schemes should be made aware not only of low costs in transactions, but also of the risks of losses they might suffer. In other words: Governance of such schemes should be made transparent, but this is also possible by means of self-regulation.

Bitcoins in Switzerland

In the US, the Consumer Financial Protection Bureau has issued a Consumer Advisory on the risks and points to be considered when using virtual currencies such as Bitcoins. The Advisory lists possible risks such as hackers, fewer protection, high costs and fraud. In Switzerland, the Federal Council in June 2014 adopted a report on the use of virtual currencies. It decided not to propose new statutory provisions, as virtual currencies like bitcoin are only seen as of only marginal economic significance and not in a legal vacuum. Nevertheless, the competent authorities and consumer protection organisations should urge users to exercise caution when using bitcoins.

There are indications that bitcoins are being ever more widely used in Switzerland.

Yet, there are indications that the “marginal economic significance” is starting to decrease and that bitcoins are being ever more widely used in Switzerland. A recent example is the University of Zurich, where students can – in a test phase – pay their purchases in the cafeteria with bitcoins.