Bitcoin Price Still Looking for New Floor after EBA Report

The European Banking Authority, a financial regulatory institution in the European Union, has released a 46 page paper voicing its opinion on the legal status of Bitcoin and crypto-currency in general. The paper, titled “EBA Opinion on ‘virtual currencies,’” outlines several things that the European Banking Authority believes are risks that individuals face when participating in the Bitcoin network.

The paper, addressed to the EU council, European Commission and the European Parliament, took a very cautionary and negative approach in its policy recommendations for these European governmental institutions. At one point in the report, the EBA suggested that the financial authorities for the European government discourage the use of “virtual currencies,” which means crypto-currencies, the most popular among them being Bitcoin. In other words, the EBA recommends that governmental authorities prohibit the usage of Bitcoin and the other “virtual currencies.” In the meantime, says the EBA, investigations should be conducted to determine what types of regulatory infrastructure should be erected around crypto-currency monetary systems to make them safe for European citizens to use. Additionally, according to Coindesk, the EBA told the various European financial institutions not to buy, sell, or hold any of these digital currencies until the new regulatory infrastructure was put in place.

The European Banking Authority highlighted over 70 risks present in the use of digital currencies across several different categories of consumer and financial security. But the main thing the EBA seems worried about is the decentralized nature of crypto-currencies, such as Bitcoin. The peer-to-peer payment network, along with a pseudonymous payment ledger– which records every payment made in the Bitcoin network without revealing the real identities of the parties involved in trade– makes it nearly impossible for governments to track down the people using Bitcoin, or other blockchain based currencies. As a result, governments would not be able to monitor and regulate the types of exchange going on in these decentralized monetary systems. Therefore, the EBA recommended that an entirely new body of regulation be implemented, through legislation, and enforced upon all crypto-currencies:

“Based on this assessment, the EBA is of the view that a regulatory approach to address these risks would require a substantial body of regulation, some components of which would need to be developed in more detail. In particular, a regulatory approach would need to cover governance requirements for several market participants, the segregation of client accounts, capital requirements and, most importantly, the creation of ‘scheme governing authorities’ accountable for the integrity of a particular virtual currency scheme and its key components, including its protocol and transaction ledger.”

In response to the EBA’s report, the Bitcoin Foundation released a statement later in the day on their official website. In this response, the Foundation said that the EBA did not even live up to the purpose of regulatory agencies that they themselves expressed in the paper, which is to “identify risks arising from financial activities, prioritise them, and take mitigating action, if required.” Rather, the Bitcoin Foundation said, the EBA chose not to make an attempt to solve the problems that they highlighted, but encouraged European financial institutions to ban Bitcoin instead.

From the Foundation’s response to the EBA report:

“Unfortunately, it’s not what the EBA’s report does. Instead, the report recommends that EU regulators ‘discourage credit institutions, payment institutions, and e-money institutions from buying, holding or selling VCs…’

That’s not mitigation, which would seek the benefits of digital currency while controlling the costs. The report, and accompanying press release, emphasize stopping the integration of digital currency into Europe’s financial services system. If that approach were adopted, it would come at a significant cost to the people of Europe, who would wait even longer to enjoy the benefits of digital currencies like Bitcoin.”

EBA Report Caused a Brief Sell-Off, Reducing the Bitcoin Price

Coindesk reported on the EBA report on the morning of July 4^th, 2014, and the Bitcoin price seemed to have had a slightly negative reaction to the news. Before news of the EBA paper made its way through the Bitcoin community, the Bitcoin price was hovering around $640, down from its previous height that fluctuated between $650 and $660. However, once people in the Bitcoin community became aware of the EBA report, fear of a European Bitcoin ban spread, which triggered a small sell-off. This brief period of selling depressed the Bitcoin price by approximately $10 and leveledd out at $630. Ever since the panic selling stopped, the Bitcoin price has stayed between the high $620s and the mid $630s (although that could change by the time this article is published).

 Post-Silk Road Auction Markets still Searching for a new Bitcoin Price Floor.

The $10 decrease in the Bitcoin price, caused by the EBA-induced fear, is not very significant when considering the fact that the price is still searching for a new floor in the aftermath of the Silk Road auction. The Bitcoin price broke through a previously established $600 price wall on the day of the Silk Road auction; when the announcement that Tim Draper had won all 30 thousand of the Silk Road Bitcoins came out, the Bitcoin price rose to $650 and briefly flirted with $660. Once the excitement about the announcement wore off, however, the price dropped down to $640. In my last analysis, I stated that the price would probably continue to decrease slightly until it found a new floor. I believe that this new price floor could be anywhere between $600 and $650. When this new floor is established, I believe the gradual upward trend in the Bitcoin price that was established in the spring will continue, given that no major, negative news breaks the trend and sets a new, downward Bitcoin price trajectory.