Rita Bairros is retail banking expert at the European Banking Authority.

1. A regulator’s view of virtual currencies
as the first use-case of blockchain technology
Rita Bairros
Retail Banking Expert
Consumer Protection, Financial Innovation and Payments Unit, EBA
The Bitcoin Conference, Vilnius, 8 April 2016

2. Outline
I. Introduction to the EBA
> The creation of the EBA
> Legal Instruments
> Scope of action
II. EBA’s work on Virtual Currencies
> Methodological approach to innovation
> Characterising VCs
> Potential benefits
> Risks
> Potential regulatory approach
> Recent developments
> Beyond VCs and towards blockchain
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3. Introduction to the EBA
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4. The creation of the EBA
 The EBA was established by Regulation (EC) No. 1093/2010
of the European Parliament and EU Council;
 came into being on 1 January 2011;
 took over all existing tasks and responsibilities from the Committee
of European Banking Supervisors (CEBS);
 took on additional tasks, incl. consumer protection, the monitoring
of financial innovation, and payments;
 is an independent authority;
 is accountable to the EU Parliament and Council;
 has as its highest governing body the EBA Board of Supervisors,
comprising the Heads of the 28 national supervisory authorities.
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5. Main objective and mandate of the EBA
Objective
“To protect the public interest by contributing to the short, medium and long-
term stability and effectiveness of the financial system, for the Union economy,
its citizens and businesses.” (Art.1(5)).
Means by which the EBA is to achieve its objective
The EBA shall inter alia “contribute to
 improving the functioning of the internal market, including in particular,
a sound, effective and consistent level of regulation and supervision;
 ensuring the taking of credit and other risks are appropriately
supervised and regulated;
 enhancing customer protection; (Art. 1(5)(f);
 monitor[ing] new and existing financial activities and adopt[ing] guidelines
and recommendations with a view to promoting the safety and soundness
of markets and convergence of regulatory practice”. (Art. 9(2))
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6. Legal instruments available to the EBA
> Technical standards
> Guidelines and recommendations
> Opinions / Technical Advice
> Warnings
> Temporary prohibitions
> Joint Positions
> Breach of Union law investigations
> Binding and non-binding mediation
The EBA has different types of legal instruments at its disposal
that differ in terms of purpose, legal status, and possible addressees.
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7. The EBA’s scope of action
> Capital Requirements Directive (CRR/D IV)
> Deposit Guarantee Scheme Directive (DGSD)
> Mortgage Credit Directive (MCD)
> Payment Accounts Directive (PAD)
> Electronic Money Directive (EMD)
> Payment Services Directive (PSD1 + forthcoming PSD2)
> Anti–Money Laundering Directive (AMLD)
> Markets in Financial Instruments Directive (MiFID/R, for structured deposits)
Given this scope of action, the EBA’s innovation work focuses on payment services,
payment accounts, electronic money, mortgages, personal loans, and deposits.
The EBA’s regulatory remit is defined by the EU Directives and Regulations
that fall into its ‘scope of action’, either because they are listed in the EBA’s
founding regulation or because they confer tasks on the EBA. They include:
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8. EBA’s work on virtual currencies
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9. The EBA’s methodological approach to innovation
EBA has an interest in ensuring that actors participating in innovative market
segments can have confidence in doing so.
> In order to achieve this, the EBA tends to assess the benefits and
risks of the innovation, to determine which, if any, regulatory
and/or supervisory action may be needed.
> In so doing, the EBA needs to trade off its concerns about risks
against its interest in harnessing the potential benefits.
> The EBA assesses innovations using a specific approach that follows several steps:
a) Characterise the innovation;
b) Identify the types of market participants;
c) Identify the potential benefits;
d) Identify and then prioritise the risks;
e) Identify the risk drivers;
f) Assess if existing legislation/regulation already addresses the risks;
g) Assess which, if any, additional regulatory and/or supervisory measures are required;
h) Assess the extent to which a consistent EU approach is needed.
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10. Characterising/defining Virtual Currencies
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> VCs can be characterised as follows:
- VCs are a digital representation of value that is
- issued by neither a central bank nor a public authority;
- is not necessarily attached to a fiat currency, but
- is accepted by natural or legal persons as a means of exchange,
- can be transferred, stored or traded electronically.
> In their decentralised variant, VC schemes tend to be created online using computer hardware,
which allows users to ‘mine’ VC units by solving complex but otherwise useless algorithms;
> The increase in the supply of VC units is said to be fixed by a mathematical protocol, preventing
future increases in supply (which many regard to be a key downside of ‘conventional’ currencies);
> VC transactions are validated by miners, who operate anonymously from anywhere in the world,
and are recorded on a transaction ledger called the blockchain;
> VC units are held in personalised accounts known as e-wallets, from which they can be sent to
anyone in the word willing to accept them;
> Participants in the market include users, merchants, exchanges, wallet providers, technical service
providers, and information providers.

11. Potential benefits
The EBA assessed a number of benefits that VCs are said to deliver:
 Reduction in transaction costs
 Reduction of transaction processing time
 Contribution to economic growth
 Financial inclusion
 Security of personal data
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12. Risks
The EBA identified 70+ risks, to users, non-user market participants, financial integrity,
fiat currency payment systems, as well as to regulatory authorities.

13. Risk drivers
Risk driver
a VC schemes can be created (and their functioning subsequently changed) by anyone, anonymously
b Payer and payee are anonymous
c Global reach that is not confined to jurisdictional boundaries
d Lack of probity of market participants
e Market participants are not incorporated as entities that could be subjected to requirements
f Opaque price formation
g No refunds or payment guarantee for market participants
h Unclear regulation
I Lack of definitions and standards that facilitate misrepresentation of product features
j Inadequate IT safety
k Information is neither objective nor equally distributed
l Insufficient funds or VC units held by some market participants
m No separation of accounts held, for example, on VC exchanges
n No complaint process: no effective channel for users to complain
o Lack of access to redress
p Lack of corporate capacity, governance, skills, controls, or systems with some market participants
q No reporting by market participants
r Interconnectedness with fiat currency payment systems
s Merchants not legally required to accept a particular VC and can switch between different VC schemes
t No stabilising authority that could provide exchange rate stability
The EBA identified numerous drivers for the many risks it had assessed.

14. A potential regulatory approach for the long-term
A. Mandatory establishment of ‘scheme governance authorities’
B. Customer due diligence (CDD) requirements
C. Fitness and probity standards
D. Mandatory incorporation
E. Transparent price formation & requirements against market abuse
F. Authorisation and corporate governance
G. Capital requirements
H. Separation of client accounts
I. Evidence of secure IT systems
J. Payment guarantee and refunds
K. Separation of VC schemes from conventional payment systems
L. Miscellaneous requirements
In order to address the risk drivers, a regulatory approach would be required
with numerous components, which will take some time to develop.
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15. The regulatory response in the meantime
 National supervisory authorities should discourage regulated financial
institutions from buying, holding or selling VCs;
 VCs can continue to innovate (including to develop solutions that satisfy
potential regulatory requirements) , but need to do so outside of the
financial services sector; and
 EU co-legislators should consider declaring virtual currency exchanges as
‘obliged entities’ under the AMLD, which would require them to comply
with AML and CTF requirements.
Until a potential long-term regulatory approach is in place, the regulated
financial system needs to be ‘shielded’ from virtual currency schemes.

16. Public interest in Virtual Currencies over time
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The EBA published a Warning to consumers on VCs in December 2013; and an
Opinion on VCs in July 2014.
Using the frequency of the search term “Bitcoin” used on Google as anecdotal
and non-conclusive evidence, the public interest in VCs appears to:
> have peaked around the time the EBA published its Warning and Opinion on VCs,
> have tapered off since then, and
> continue to show a lower but still consistently high search frequency.
EBA
Warning
EBA
Opinion

17. European legislators show growing interest in VCs
 The European Council has reacted to the terrorist attacks in Paris by inviting the
European Commission to strengthen controls of non-banking payment methods such as
electronic/anonymous payments, money remittances, pre-paid cards, and VCs;
 The European Commission has presented an Action Plan to strengthen the fight against
the financing of terrorism in which it conveys its intention to tackle terrorist financing
risks linked to VCs and to develop related requirements by the end of Q2 2016. The focus
seems to be the regulation of VC exchange platforms, which are to be brought into the
scope of certain provisions in the Anti-Money Laundering Directive (AMLDIV) and
possibly the revised Payment Services Directive (PSD2);
 The European Parliament has published a Draft Report on VCs, whereby it recommends
the review of the EU legislation on payments, such as PSD, in light of the possibilities
afforded by new technological developments including VCs and distributed ledger
technology.
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18. Beyond VCs and towards blockchain
 Since the EBA published its EBA Opinion in July 2014, the interest has shifted, from the
narrow focus on VCs a first use-case of blockchain technology, towards blockchain
technology itself, and distributed ledgers.
 Other promising use-cases for the technology have emerged in the process, such as trade
clearing and settlement, and smart contracts.
 For the EBA, this shift in focus is a promising development, as the new use-cases seem to
avoid one of the key risks that the EBA had previously identified for the blockchain
technology of VCs: that VC transactions could be clocked through 51% attacks and, thus, the
functioning of VC schemes be changed, by anyone, and anonymously so.
 For a payments regulator like the EBA, this lack of accountability of a payment scheme was
never a viable or acceptable proposition.
 By contrast, the new emerging use-cases appear to revert to modified variants of
blockchain technology that seem to tackle this risk, e.g. through ‘permissioned’ ledgers.
Would conference participants agree that such adaptions of the blockchain would
allow for more accountability and prevent some of the risks identified in the past?
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19. Thank you
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20. EUROPEAN BANKING AUTHORITY
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Tel: +44 207 382 1776
Fax: +44 207 382 1771
E-mail: info@eba.europa.eu
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