EBA warns of Bitcoin risks

The European Banking Authority (EBA) today delivered a stark warning over the risks involved in buying, holding or trading virtual currencies such as Bitcoin.

The EBA is currently assessing whether virtual currencies should be regulated and supervised, and in the meantime has flagged up a range of issues that people face when handling them.

It placed particular emphasis on the possibility that consumers could lose money through virtual exchange platforms. "No specific regulatory protections exist that would cover you for losses if a platform that exchanges or holds your virtual currencies fails or goes out of business," the statement said.

There is also the risk that money will be stolen from the 'digital wallets' where it is stored online. While most wallets have numerous security features, they can be vulnerable to computer hackers.

"Similar to conventional wallets, money may therefore be stolen from your wallet," the statement said. "Cases have been reported of consumers losing virtual currency in excess of $1 million, with little prospect of having it returned."

The EBA also warned consumers about the volatility in the price of, in particular, Bitcoin, which has fluctuated wildly in the past eight days. It depreciated by 47% against the US dollar on December 5 when the People's Bank of China (PBoC) sought to crack down on its use – although it has quickly regained most of that value.

The PBoC banned China's commercial banks from handling Bitcoin transactions on the grounds the currency is not controlled by a monetary authority and can be used to facilitate money laundering and other criminal activities – concerns echoed by the EBA today.

Other central bankers have been more welcoming. Federal Reserve chair Ben Bernanke has commented on the potential "long-term promise" of virtual currencies, while the Bank of England's chief cashier Chris Salmon said it was possible central banks would one day issue their own Bitcoin equivalent.

The EBA did not express an opinion on the quality or longevity of virtual currencies, but tellingly told consumers: "You should not use 'real' money that you cannot afford to lose" – the first piece of advice given to any prospective gambler.