Banks should 'segregate' any bitcoin activities: ECB

Frankfurt am Main - Banks wanting to trade in digital currencies should make sure those activities are clearly "segregated" from their other operations, a top ECB official cautioned on Monday, as ever more financial institutions mull jumping on the bitcoin bandwagon.

"Due to the high volatility of VCs (virtual currencies) it might seem appropriate to require any VC trading to be backed by adequate levels of capital, and segregated from other trading and investment activities," European Central Bank board member Yves Mersch said in a speech in Turkey.

The warning comes as regulators worldwide grapple with how to respond to the boom in so-called cryptocurrencies like bitcoin, which lure investors with the promise of high returns but are not backed by any central banks and can fall prey to scams.

Virtual currencies "are not money" and their influence on the real economy remains limited, Mersch insisted.

"But this can change," he admitted.

US banking giant Goldman Sachs announced plans in March to start trading bitcoin futures, in what could be a step towards giving the notoriously opaque cryptocurrency market more legitimacy.

Several smaller financial players have already taken the plunge.

In Switzerland, Falcon Private Bank offers asset management services for a range of cryptocurrencies, including bitcoin and ethereum, while financial and trading services group Swissquote offers trading in five virtual currencies.

Underscoring the high risk that comes with betting on virtual currencies, Mersch noted that the price of bitcoin had plunged from almost $20 000 to below $7 000 between December and February.

Bitcoin trading is still in its infancy, Mersch said, with about 200 000 bitcoin transactions carried out globally each day compared with 330 million retail payments in the euro area.

But if the use of cryptocurrencies spreads, "a crash could affect the stability of the wider financial system if big banks were to hold huge unhedged exposures to VCs", he warned.

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