Virtual money such as bitcoin poses threats - Central Bank

Virtual cash such as bitcoin provides potential channels for tax evasion and money-laundering, the Central Bank's director of markets supervision, Gareth Murphy, warned yesterday.

Speaking at a conference in Dublin, he urged the virtual currency industry to actively address financial authorities’ concerns “rather than playing cat-and-mouse and eventually, and inevitably, being drawn into the regulatory net”.

Mr Murphy, the Central Bank director responsible for supervising the Republic's stockbroking and asset-management industries, was speaking at the Bitfin 2014 conference in the RDS.

He told the gathering that regulators have specific concerns about virtual currencies. These include the threat of “tax leakage” to the virtual economy. “There is a substantial threat to the country’s finances if more and more transactions for goods and services in the national economy disappear from the tax net,” he said.

Crime proceeds

Virtual currencies also offer a channel through which the proceeds of crime can be used to buy goods and services, something financial authorities worldwide are trying to combat through tougher anti-money-laundering laws.

Mr Murphy explained that they raise problems for exchange rate mechanisms, consumer protection and the linked area of payment and settlement systems, which are needed to ensure a safe means of completing financial transactions. The official also warned that allowing somebody other than a central bank to create money raised a potential issue of sovereignty, with clear implications for financial authorities.

He argued that legally mandated reporting of all activity in virtual currencies would be a necessary element of any regulatory regime. “Choices would have to be made in relation to who should be legally obliged to report to financial authorities,” Mr Murphy said. “That would potentially bring a whole new set of parties into the regulated net.”

Legal framework

While some existing rules could be used, he predicted that regulations based on new legal concepts, which are going to have to stand the test of time, are likely to be needed in any rulebook to cope with virtual currency. Once that rulebook is drawn up, he warned it would have to be supervised and enforced, which is likely to require extra manpower and resources: “Effective resolution relies on all of these aforementioned steps as well as potentially significant powers of intervention and the appetite to use them.”

Bitfin 2014 was the first event to involve both the virtual currency industry and conventional financial services.