In a legal opinion recently published by the European Central Bank (ECB), the Union’s apex bank has outlined some of the reasons it thinks the European Union members should not promote the use of digital currencies.
Though the ECB recognises that the technological advances relating to the distributed ledger technology underlying alternative means of payment, such as virtual currencies, may have the potential to increase the efficiency, reach and choice of payment and transfer methods, it warned:
“...the Union legislative bodies should take care not to appear to promote the use of privately established digital currencies, as such alternative means of payment are neither legally established as currencies, nor do they constitute legal tender issued by central banks and other public authorities.”
Some of its other concerns include the higher volatility associated with virtual currencies, which does not always appear to be related to economic or financial factors and the lack of guarantee for holders of virtual currency that they will be able to exchange their units for goods and services or legal currency in the future.
Virtual currencies “could affect control”
The opinion says:
“...the reliance of economic actors on virtual currency units, if substantially increased in the future, could in principle affect the central banks’ control over the supply of money with potential risks to price stability, although under current practice this risk is limited. Thus, while it is appropriate for the Union legislative bodies, consistent with the FATF’s recommendations, to regulate virtual currencies from the anti-money laundering and counter-terrorist financing perspectives, they should not seek in this particular context to promote a wider use of virtual currencies.”
The ECB’s opinion is in response to the requests made by the Council and the European Parliament on a proposal for a directive amending Directive (EU) 2015/849 which centres on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
The proposed directive expands on the list of obliged entities to which an EU Directive applies to include providers engaged primarily and professionally in exchange services between ‘virtual currencies’ and ‘fiat currencies’. It also requires Member States to ensure that providers of exchanging services between virtual currencies and fiat currencies and custodian wallet providers are licensed or registered.
This is based on several views including that virtual currencies do not qualify as currencies from the Union’s perspective but could be regarded as a means of exchange, rather than as a means of payment and that terrorists and other criminal groups are currently able to transfer money within virtual currency networks by concealing the transfers or by benefiting from a certain degree of anonymity on such exchange platforms.
It says the use of virtual currencies also poses greater risks than traditional means of payment in the sense that the transferability of virtual currency relies on the internet and is limited only by the capacity of the particular virtual currency’s underlying network of computers and IT infrastructure. It stresses that the inability to cover virtual currency transactions by any of the control measures provided for in the proposal could provide a means of financing illegal activities.
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