The spread of Bitcoins is now prompting regulators in Scandinavia to draft new rules in an effort to prevent virtual money from slipping into a legal gray zone.

Denmark is the latest nation to prepare standards to protect its consumers from risks associated with virtual currencies after the regulator found it lacked authority to prevent a company creating an exchange for the software.

The most likely outcome would be an "amendment to existing financial legislation so that we have regulation covering it," Michael Landberg, chief legal adviser at the Financial Supervisory Authority in Denmark, said Dec. 17 in a phone interview. "It is also important to have this included in money laundering acts."

More and more nations are taking an official stance on virtual currencies that aren't controlled by any government or central bank. Norway said this month it won't recognize Bitcoins as legal tender and will impose a capital gains tax. Prices sank as much as 35 percent today after China's largest Bitcoin operator, BTC China, said a third-party payment provider gave notice it will no longer provide deposit services. That followed a move by China's central bank to bar financial institutions and payment companies from handling Bitcoin transactions.

"There are clearly issues that need to be solved on the use of Bitcoins," Benny Engelbrecht, spokesman for Denmark's ruling Social Democrats on the parliament committee overseeing financial regulation, said in an interview. "There's clearly a need to regulate Bitcoins and other virtual currencies; it's not something we can do on our own. It has to be done on the European level and globally."

Denmark plans to "align" itself with other nations in designing a framework that deals with gray zones created by the use of Bitcoins and its competitors, Landberg said. The FSA is preparing draft legislation for lawmakers to consider, he said.

Since their introduction in 2008, Bitcoins have spread rapidly, with about 12 million in circulation, according to Bitcoincharts. They're now used to pay for everything from hand-made rugs to window cleaning.

"We'll seek to follow the mainstream," Landberg said. "Bitcoins are not forbidden in the U.S. and the U.K. It is out there and will continue to be out there. It just needs to be regulated. The challenge for us is how to do that."

Because Denmark's FSA doesn't currently have the legal authority to prevent trade using Bitcoins, it was unable to stop an entity from "establishing itself in this country with the intention of operating a company that exchanges real currencies against so-called virtual currencies, among others, Bitcoins," the regulator said yesterday, without identifying the firm.

Lasse Birk Olesen, who tapped his personal savings to start Copenhagen-based Bitcoin Nordic, says entities seeking to trade in virtual currencies will benefit from yesterday's FSA finding.

"We looked into the rules and the conclusion we came to was that our business would not be financially regulated," he said by phone. "This is overall positive."

The European Banking Authority on Dec. 13 released a warning on the risks of using unregulated digital money that is susceptible to hackers.

"Cases have been reported of consumers losing significant amounts of virtual currency with little prospect of having it returned," the EBA said. "When using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law."

The price of Bitcoins soared above $1,000 earlier this year, compared with about $12 a year ago, according to Mt. Gox, an online exchange dealing in Bitcoins.

"Anything accepted as a 'medium of exchange' for goods and services is money in some sense," Paul Donovan, senior global economist at UBS AG in London, said in a note. "However, there is an important distinction when it comes to tax, as Norway so obligingly demonstrates. The tax treatment of money and of assets differs."

Introduced five years ago by a programmer, or group of programmers, going under the name of Satoshi Nakamoto, Bitcoins can potentially reduce banking-transaction fees, making it an attractive option for trading via the Web or in stores.

The EBA listed among Bitcoins' weaknesses a susceptibility to being used in crime.

Bitcoin supporters say they welcome clarity on how to treat virtual currencies.

"Denmark is still in a vacuum on whether Bitcoins should be treated as goods or as a currency or as a share," Pascal Mikkelsen, chairman of the Danish Bitcoin Association, said in an interview. "We expect there still to be confusion for some time now because politicians and the government aren't in a position to make a decision on something they don't understand."

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