Danmarks Nationalbank, the Danish central bank, has issued a stern warning on bitcoin, saying that it is not money in the true sense of the word, as it is not backed by an issuing institution.
Rather than functioning like money, bitcoins display the characteristics of commodities – that is, users attach value to them, not issuers or central banks.
Yet, said the bank, bitcoins do not have intrinsic value like gold and silver, and they bear a closer resemblance to "glass beads" – an apparent reference to the beads that were traded in past centuries for gold, ivory and other commodities.
No value anchor
"Bitcoin is a virtual currency without any value anchor and hence it may rise sharply or fall very suddenly. A core property of money is that its value is stable so that its purchasing power does not change markedly from day to day," said the bank's Governor Hugo Frey Jensen. He added:
"In spite of the considerable focus, use of bitcoins as a means of payment remains very limited. Against that background, the risks linked to their use are currently assessed to be limited to the individual user."
He added that European authorities are analysing the need to regulate such virtual currencies. In December 2013, the European Banking Authority (EBA) issued a warning on the potential risks related to virtual currencies, focusing on fraud and theft.
The bank warns that bitcoin is subject to wild fluctuations and recent events such as cyber attacks launched against bitcoin exchanges illustrate the risks associated with digital currencies. Since bitcoins are not protected by depositor guarantees or consumer protection legislation, investors face high levels of risk.
Reluctant to regulate
Last year, Denmark's Financial Supervisory Authority (FSA) clearly stated that the use of digital currency in the country is not regulated. The FSA said it would not police digital currencies, as they are not covered by existing regulation.
Most countries in Europe have adopted a similar stance. They do not view digital currencies as money, hence regulators do not think it is within their purview to deal with them.
The FSA also outlined a number of concerns and risks associated with bitcoin and other digital currencies. These ranged from tax implications to the risk of losing money invested in digital currencies through theft or volatility.
Glass beads image via Shutterstock