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Virtual currency schemes (European Central Bank)


Virtual currency schemes – a further analysis.



Virtual currency schemes (VCS) have experienced remarkable developments over the past two years. As announced in its October 2012 report, the ECB has been examining these developments, partly in order to understand their potential relevance for retail payments.

Although the term “virtual currency” is commonly used – indeed, it often appears in this report – the ECB does not regard virtual currencies, such as Bitcoin, as full forms of money as defined in economic literature. Virtual currency is also not money or currency from a legal perspective. For the purpose of this report, it is defined as a digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money. The term “virtual currency scheme(s)” is used throughout this report to describe both the aspect of value and that of the inherent or in-built mechanisms ensuring that value can be transferred.

The VCS “ecosystem” consists mainly of specific, new categories of actors which were not present in the payments environment before. Moreover, emerging business models are built around obtaining, storing, accessing and transferring units of virtual currency. Many schemes have appeared and some have already disappeared again, but around 500 exist at the time of writing. This is in stark contrast to the situation of two years ago when it was only really Bitcoin that was known about. Some of these new VCS are designed with slightly different technical characteristics that could improve the functionality or some elements in the ecosystem. For many, however, it is unclear what their purpose is, as it seems that only a few are used, or are intended to be used, for payments. The acceptance of VCS for payments does not seem widespread, although some prominent e-commerce merchants did announce that they would start accepting payments with Bitcoin. Data concerning the usage of VCS as a payment method are not readily available. Bitcoin is used for around 69,000 transactions per day worldwide, compared with a total of 274 million non-cash retail payment transactions per day for the EU alone.

VCS present several drawbacks and disadvantages for users, i.e. lack of transparency, clarity and continuity; high dependency on IT and on networks; anonymity of the actors involved; and high volatility. In addition, users face payment system-like risks owing to their direct participation in the VCS, as well as risks associated with certain intrinsic characteristics of VCS, i.e. the counterparty risk associated with the anonymity of the payee, the exchange rate risk associated with high volatility and the risk of investment fraud associated, inter alia, with the lack of transparency. There are currently no safeguards to protect users against these risks.

Nevertheless, VCS present some advantages as perceived by users. They could pose a challenge to retail payment instruments and innovative payment solutions as regards costs, global reach, anonymity of the payer and speed of settlement. A new or improved VCS, if it overcame the current barriers to widespread use, might be more successful than the existing ones, specifically for payments within “virtual communities”/closed-loop environments (e.g. internet platforms) and for cross-border payments.

A number of international authorities have developed an interest in VCS, including the Financial Action Task Force (FATF), given the potential risks for the integrity of the international financial system. Several central banks and financial and supervisory authorities around the world have warned users of the risks related to holding and transacting virtual currencies, provided clarifications...

Download below the report (PDF 37 pages)

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Vendredi 19 Février 2016
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