Virtual currency schemes - the perspective of a central bank

Transcription

1 Iddo de Jong Payments & Market Infrastructure Virtual currency schemes - the perspective of a central bank CPSS - The World Bank Forum on Retail Payments Cape Town, 3-4 December 2013

2 EUROPEAN CENTRAL BANK: PERSPECTIVE ECB regularly examines developments with regard to (retail) payment systems and payment instruments Work on virtual currency schemes started in 2011 after increased press coverage and following outside requests (public, press, public authorities) ECB Report published in October 2012 Renewed hike in press coverage in March-April 2013 Disclaimer: as the ECB is not a law-enforcement agency, it only noted that some virtual currencies are used by criminals, fraudsters and money launderers to perform their illegal activities. 2

3 CURRENCY OR PAYMENT INSTRUMENT / SYSTEM? If the currency was physical, it could be seen as the equivalent of cash (coins or banknotes). However, it is digital, which necessarily implies that there is a procedure to make payments in that currency and have these transactions settled. As it resembles at the same time money as well as a retail payment system, virtual currency scheme captures better this phenomenon. This is the point of departure for ECB in its task of promoting the smooth operation of payment systems. 3

4 TYPES OF VIRTUAL CURRENCY SCHEMES FOUND 1. Closed virtual currency schemes Almost no link to the real economy ( in-game only ); sometimes a subscription fee. For virtual goods/services and cannot be traded outside the virtual community. Example: World of Warcraft (WoW) Gold 2. Virtual currency schemes with unidirectional flow Purchased using real currency at specific exchange rate, but cannot be exchanged back. For virtual goods/services, but some also allow for real goods/services. Examples: Facebook Credits, Amazon Coins, Nintendo Points, but also frequent-flyer points 3. Virtual currency schemes with bidirectional flow Buy and sell virtual money according to the exchange rates. For both virtual and real goods and services. Example: Second Life Linden Dollars (L$), Bitcoin 4

5 BITCOIN Total Market Cap 12,048,025 BTC USD 10,663,706,928 / EUR 9,036,018,750 5

6 IS A VIRTUAL CURRENCY, LIKE BITCOIN, MONEY? It is used for payments, albeit in specific virtual communities or certain niches (medium of exchange) Prices are quoted in Bitcoin, although these will be kept close to another, real currency (unit of account) Some people have forgotten about their Bitcoins, just to find out that they were now rich (store of value) Plus: several tax authorities have decided that it is! Money is a social institution and it changes with the needs of society 6

7 VIRTUAL CURRENCY: DEFINITION No legal tender status Legal status Unregulated Regulated Certain types of local currencies Banknotes and coins Virtual currency E-money Commercial bank money (deposits) Physical Digital Money format 7

8 ARE CENTRAL BANK TASKS AFFECTED? (I) Risks to price stability (of the central bank s currency) Effect on quantity of money Effects on velocity of money, use of cash, and/or measurement of monetary statistics Interaction with real economy Preservation of the unit of account function However, risks are entirely dependent on the quantity of virtual money and the usage of the virtual currency. o Facebook Credits could have provided mass usage. In China, Q-coins had by 2009, and were forbidden for the purchase of real goods/services. 8

9 ARE CENTRAL BANK TASKS AFFECTED? (II) Risks to financial stability Directly from within the banking system Indirectly when connected to real economy via a bilateral exchange rate: price and price volatility However, risks are entirely dependent on the volumes traded and the connection with the real economy. As it is currently outside of banking system, only the risk via the exchange rate is current. o Banks could start acting as depository, pay interest, allow borrowing and lending, engage in money creation (by lending more than the deposits taken). 9

10 ARE CENTRAL BANK TASKS AFFECTED? (III) Risks to payment system stability Typical risks as with any other retail payment system (not overseen) Creditworthiness of the issuer of the settlement asset (not supervised) Finality and irrevocability in absence of a real central bank of issue / lender of last resort However, the systems are not of a critical nature. Fall within central banks responsibility as a result of characteristics shared with payment systems. 10

11 ARE CENTRAL BANK TASKS AFFECTED? (IV) Could negatively impact central bank reputation, if an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly. Expectation is that virtual currency schemes will continue to grow => theoretical risks become acute. Central banks to continue monitoring and periodically reassess the risks. 11

12 NEED FOR OTHER ACTIONS Some virtual currencies can be / are being used by criminals, fraudsters and money launderers to perform their illegal activities. Law-enforcement agencies have intervened recently. Should other authorities formalise, acknowledge and regulate these virtual currency schemes? Anti-Money Laundering / Counter Terrorism Financing? License/register wallet providers as they offer a type of (payment) account? License/register the currency trading platforms (like any other currency exchange / bureau de change)? Impose consumer protection measures? 12

13 ECB S VIEWS In the current situation, given their size, and subject to the information available, virtual currency schemes... Do not currently pose a risk to price stability nor can they jeopardise financial stability; Are not (yet) regulated and not closely supervised or overseen by any public authority risk for users; Are a challenge for public authorities, as they can be used by criminals, fraudsters and money launderers to perform their illegal activities; Fall within central banks responsibility as a result of characteristics shared with payment systems. 13

14 Thank you for your attention! Disclaimer The views expressed in this presentation are those of the speaker and do not necessarily reflect those of the European Central Bank. 14