EBA Bitcoin Report

The EBA has published a useless and harmful paper titled “EBA Opinion on ‘virtual currencies'” on July 4th. The EBA is the “European Banking Authority“, a regulatory body of the European Union based in London.

It lists “over 70” risks of using virtual currencies like Bitcoin. I get the impression that they tried very hard to find anything possible to talk Bitcoin down. I don’t have time to address all of their points, but a couple of samples should give you an idea.

For example, they see it as a “risk” of the Bitcoin system that an exchange operator like MtGox has gone bankrupt. That makes as much sense as blaming the inability of Greece to pay back their debt as a “risk” of the Euro. Or even less, since while the MtGox mess was of significant volume, that volume of course pales compared to the risks of reckless state debt levels, bailouts of failed banks with taxpayer money, and other illegal abuses of the current financial system like the LIBOR scandal.

Another “high priority” risk they see is that of volatility. They completely fail to mention the little fact that anyone who has held bitcoins for more than a year has realized (on average) a more than ten fold increase in the worth of that investment, something not happening very often in financial markets. I challenge the EBA to name one (1) investment that has outperformed bitcoins over the last four years.

Anyway, there are lots of investments that are high risk in the first place and can then be leveraged into even higher risks. The Credit Default Swaps mentioned above come to mind. Since when is it the business of a regulator to worry about investment risks citizens are taking, as long as they are informed about that risk? And since when is it acceptable for a regulator to ban any investment that is not absolutely stable?

One last example, this one of a “risk” that is clearly completely fabricated, just to show to what lengths these guys go to make Bitcoin somehow look bad:

The inevitable lack of standards and definitions found in innovative products and services makes it difficult for users to gauge the features of a particular VC scheme. The units of the VC scheme bought may even transpire to be different from the expected scheme. The risk arises because anyone can anonymously create (and subsequently change the functioning of) a VC scheme, any computer file can be misrepresented as a VC and any scheme name can be given to that file, including the name of an existing, genuine VC. Once the user detects the misrepresentation, they will be unable to reverse their decision as VC transactions are not reversible, the counterparties are anonymous, no legal contracts exist, and no complaints procedures are in place. The risk is of medium priority.

Yes. Anyone can create a new virtual currency scheme. But I challenge the EBA to try to create a new scheme and trick anyone into thinking that their units of value are actually bitcoins. That would be the equivalent of counterfeiting bitcoins. No one can do that.

Their proposed short-term remedy:

To that end, the EBA recommends that national supervisory authorities discourage credit institutions, payment institutions, and e-money institutions from buying, holding or selling VCs, thereby ‘shielding’ regulated financial services from VCs.

They should shield these institutions from gambling at the Credit Default Swap casino instead. CDS are a real risk to the stability of financial systems, since there were over $25 trillion outstanding CDS contracts in 2012. Bitcoin and other virtual currencies are small in comparison. There is no way they could pose a threat to the stability of the financial system at their current market caps.

This is the equivalent of a regulator in 1994 recommending that banks refrain from dealing with the “risky” Internet, as long as there is no Central Internet Authority (CIA) that would be responsible for any concerns regulators like the EBA might want to raise.

And it is a perfect way to actually increase risks to consumers. MtGox was allowed to go bust with over $500 million in customer assets exactly because it was not regulated like a bank. If the EBA wants banks and other financial institutions to stay away from the Bitcoin network, that by definition only leaves unregulated and therefore less secure institutions to provide services like exchanges.

Way to go, EBA. You are making things worse for the citizens you are supposed to protect.

The EBA also floats the idea of a “scheme governance authority”, which would in the case of the Bitcoin network be called the “Bitcoin governance authority”. The existing Bitcoin Foundation might evolve into something like this. Again, from the paper:

It is a legal person, and is responsible for maintaining the integrity of the central transaction ledger, the protocol, and any other core functional component of the scheme. The scheme governance authority would be required to comply with regulatory and supervisory requirements of various kinds to mitigate identified risks.

I guess one could build such an institution. One could also build a Central Internet Authority.

But trying to “shield” financial institutions from the “risks” of Bitcoin until that happens is as realistic as trying to shield them from the Internet. Of course banks will need to integrate Bitcoin services, or the whole sector will be left behind in the European Union compared to the United States or Japan, who as of now don’t suffer from this kind of fear of the unknown.

Update: Ken Tindell discusses this report in much more detail here. He doesn’t have a high opinion of it either. As he explains, the authors don’t seem to understand Bitcoin, especially the fact that while everybody can build a new virtual currency, it is very difficult to match or surpass Bitcoin’s network effect advantage.


Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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