European watchdog issues warning about Bitcoins

Trading Bitcoins could bleed you dry, the European Union's top banking regulator said as it weighs whether to regulate virtual currencies. Thefts from digital wallets have exceeded $1 million in some cases and traders aren't protected against losses if their virtual exchange collapses, the European Banking Authority (EBA) said today in a report warning consumers about the risks of cybermoney.

Virtual currencies such as Bitcoin have come under increased scrutiny from regulators and prosecutors around the globe. China’s central bank barred financial institutions from handling Bitcoin transactions last week and German police arrested two suspects in a fraud probe into illegally generated Bitcoins worth €700,000.

“The technology is still relatively immature and lacks the infrastructure, regulation and understanding of the risks that are taken for granted in conventional financial systems,” Matt Rees, assistant director at Ernst and Young, said in an e- mail. “It is not surprising then that thefts, frauds and other deceptions are currently commonplace.”

Since Bitcoins exist as software, the virtual currency isn’t controlled by any government or central bank. The digital money emerged in 2008, designed by a programmer or group of programmers going under the name of Satoshi Nakamoto, whose real identity remains unknown.

Bitcoins are being used to pay for everything from Gummi bears to digital cameras on the Web, with more than 12 million in circulation, according to Bitcoincharts, a website that tracks the online money’s activity. The virtual currency gained credibility last month after law enforcement and securities agencies said in US 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 $866 on Bitstamp, an online exchange based in Slovenia. It would cost around $10.5 billion to buy all the Bitcoins in existence, according to Bitstamp.

“Should the popularity of a particular virtual currency go down, for example if another virtual currency becomes more popular, then it is quite possible for their value to drop sharply and permanently,” the EBA said in a statement published on its website.

People holding virtual currencies may be subject to value- added or capital gains taxes, the EBA said. The government of Norway, Scandinavia’s richest nation, said it would treat Bitcoins as an asset and levy capital gains tax on them. “Bitcoins don’t fall under the usual definition of money or currency,” Hans Christian Holte, director general of taxation in Norway, said.

For virtual currencies to be regulated in the EU, the EBA would have to get approval from the European Commission, the 28- nation bloc's executive arm. We "support the EBA warning to consumers on the risks associated with virtual currencies," Michel Barnier, the EU's financial services commissioner, said in an e-mail.

The US Treasury Department’s Financial Crimes Enforcement Network has said that Bitcoin businesses may be considered money transmitters for the purpose of complying with money-laundering laws. State agencies typically license such businesses.

Bloomberg