The European Union's banking regulator has advised banks operating in the region to refrain from buying, holding or selling digital currencies such as bitcoin until there is a regulatory regime in place.
The decision by the European Banking Authority (EBA) comes after a thorough assessment of virtual currencies along with other relevant authorities including the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA).
"While there are some potential benefits from virtual currencies, such as faster and cheaper transactions, as well as financial inclusion, risks outweigh the benefits, which in the European Union remain less pronounced," the EBA said in a statement.
The EBA said it has identified more than 70 risks across several categories, including risks for users, market participants, risks related to financial integrity, such as money laundering and other financial crimes, and risks to existing payments in conventional currencies.
The EBA warned that decentralised virtual currency schemes such as bitcoin "can be created and its function subsequently changed by anyone with a sufficient share of computational power" and anonymously so.
In addition, IT security cannot be guaranteed in such schemes as miners, payers and payees can remain anonymous.
The EBA noted that "a substantial body of regulation" will be required to address these risks.
"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," the EBA said.
Until the establishment of such a regime, the EBA asked the member states to discourage its financial institutions from dealing in virtual currencies.
"As an immediate response, the EBA advises national supervisory authorities to discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies," the regulator said.
This is for the second time the EBA is disclosing its view on virtual currencies. The regulator started evaluating virtual currencies in 2013 and issued a public warning on 13 December about the risks involved in such currencies.
Transactions in digital currencies are done anonymously over peer-to-peer networks, and this feature has been a serious concern for regulators.
Critics say the crypto currencies could be used for drug transactions, money-laundering and other illegal activities due to the near anonymity of those who deal in them.
A number of regulators across the globe have warned consumers about risks of digital currencies.