Europe’s warning on Bitcoin

EBA points to risks of trading in virtual cash after Bank of America sings its praises

This 2013 photo shows bitcoin tokens at software engineer Mike Caldwell' s shop in Sandy, Utah.
This 2013 photo shows bitcoin tokens at software engineer Mike Caldwell' s shop in Sandy, Utah.ap

The European Banking Authority (EBA) has issued a warning about the dangers of dealing with virtual money, and in particular bitcoins.

The Bitcoin system was created in 2009 by Satoshi Nakamoto, but it is not known if this is the name of an individual or a group. Bitcoin is a decentralized and anonymous monetary system independent of governments and banks. Regarded as safe, it circulates using P2P on the internet.

Before disappearing, Nakamoto created a monetary system that would allow 21 million bitcoins to circulate in cyberspace. Currently, there are 12 million in circulation.

How, where and when to buy

  • How are payments verified?This is the key to a virtual monetary system. With real money, a bank acknowledges the withdrawal and receipt of funds and certifies payments. In the case of bitcoins, this task is carried out by so-called miners, who certify the validity of a payment. However, one of the disadvantages of bitcoins is that the mining process can take up to 50 minutes to complete.
  • I want to buy. First of all, you have to create a virtual wallet. You have to go to websites such as Blockchain.info or Mt.gox.com, among many others, to do so. Thereafter security codes are created that identify the owner of the bitcoins.
  • I want to sell. You can go to one of the "official" websites such as Mt.Gox.com or to individuals. LocalBitcoins.com carries a list of would-be buyers and sellers of bitcoins closest to your home and what the bitcoin is currently trading at. The exchange rates for the bitcoin vary a great deal.
  • Why does its value fluctuate so much? For the same a posteriori reasons given for movements in share prices. Forecasts about trends in the price have been off the mark, but rates do coincide with certain events, such as the low of 100 euros reached during the Cypriot banking crisis.

Although the system has been on the go for five years, it has only really started to take off in the past year. At the start of this year, the value of bitcoins in circulation was 106 million euros but now they are worth 6.434 billion. Growing use is being made of them in electronic trade but also in the provision of services.

Aware of the growing popularity of this virtual money, the EBA pointed out that platforms for exchanging bitcoins for real money are not guaranteed against any losses that might be incurred in the event of one of these platforms going under.

The EBA also alerted people to the fact that bitcoins stored in so-called digital wallets could be hacked and stolen, as has already happened on a number of occasions. It also warned that the value of the virtual currency could fall as quickly and sharply as it has risen and could even have zero value. The European authority also advised people not to take out loans to acquire bitcoins, and made clear that they cannot be used as a guarantee of payment in the real world.

The EBA's warning came a year after a report by the European Central Bank on bitcoins. While last year it warned that they posed no risk to the traditional monetary system, they said that if their use were to expand, which has been the case, then this could undermine it.

The authority also warned about virtual currencies being used in criminal activity. "Transactions in virtual currencies are public, but the owners and recipients of these transactions are not," it said. "Transactions are largely untraceable, and provide virtual currency consumers with high degrees of anonymity. It is therefore possible that the virtual currency network will be used for transactions associated with criminal activities, including money laundering. This misuse could affect you, as law enforcement agencies may decide to close exchange platforms and prevent you from accessing or using any funds that the platforms may be holding for you."

The EBA also warned about tax liabilities that virtual currencies may entail. "You should be aware that holding virtual currencies may have tax implications, such as value-added tax or capital gains tax. You should consider whether tax liabilities apply in your country when using virtual currencies."

The EBA's warnings about virtual currencies contrasted with a recent report by Bank of America Merrill Lynch, which lauded Bitcoin as a serious competitor in e-commerce and good alternative in those countries with unstable currencies that are subject to frequent intervention by the authorities.

China recently warned its banks not to deal in bitcoins, while Germany imposed a tax on trading in the currency. Although Norway does not recognize the currency, the authorities there also imposed a tax on capital gains obtained from dealing in the coins and tax credits in the case of losses.

A Norwegian, Kristoffer Koch, is precisely one of the people who have reaped the most capital gains from his stash of bitcoins. He invested 24 dollars in them in 2009 and they are now worth 800,000 dollars (582,000 euros). He used the money to buy himself an apartment. The bitcoin is currently trading at over 700 dollars.

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