The central bank of Estonia, where Swedish banks dominate the lending market, urged consumers to steer clear of Bitcoin and similar virtual currencies, warning such software could prove to be little more than a "Ponzi scheme."
Bitcoin "is a problematic scheme," Mihkel Nommela, head of the Estonian central bank's payment and settlement systems department, said in an e-mailed reply to questions. "All risks are assumed by the user, who has no one to turn to for help."
Regulators and banks are escalating warnings against Bitcoin, and other digital currencies, amid concern such software lends itself to financial crime. Bitcoin enthusiasts suffered a blow this week when it emerged Charlie Shrem, vice chairman of Bitcoin Foundation, was charged in the U.S. for attempting to sell Bitcoins to narcotics traffickers.
SEB AB, the largest Nordic currency trader and the second- biggest bank in the Baltic region, is rejecting requests from clients seeking to set up accounts to manage Bitcoin. No Nordic regulator recognizes the software as money and Nordea Bank AB, Scandinavia's biggest bank, is telling clients to think twice before touching Bitcoin.
"All in all, virtual currency schemes are an innovation that deserves some caution, given the lack of any guarantees and responsible parties to back them in the longer term or evidence that this isn't just a Ponzi scheme," said Nommela.
Estonia, Lithuania and Latvia, which joined the euro this year, got burned in 2008 as a real estate boom turned to bust and a global credit freeze hobbled exports. The three nations suffered the deepest recessions in Europe at the time, with Latvia's economy contracting by more than a fifth in 2008-2009.
The experience has underscored resolve among regulators in the region to protect financial markets from products that display outsized value shifts. The Estonian finance ministry, responsible for regulation, and the central bank in Lithuania haven't yet taken any steps to regulate virtual currencies.
The central bank of Lithuania today issued a statement urging consumers "to be extremely cautious" with virtual currencies.
"Such currencies are created and managed by people or groups that nobody supervises," Vilius Sapoka, director of the Financial Services and Markets Supervision Department at the bank, said in the statement. "So there's a very big risk that the 'creators' could disappear with people's money."
Bitcoin's price has fluctuated according to the newsflow around its safety and popularity. It topped $1,000 for the first time in November, as speculators anticipated broader use of digital money. The price has since dropped more than 20 percent, according to Bitstamp, one of the more active online exchanges where Bitcoins are traded for dollars and other currencies. One Bitcoin cost about $15 a year ago.
Bitcoin supporters say they are building a system to move money across the Internet securely and at a lower cost than existing wire transfers, bank debits or remittances.
Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority, and uses a public ledger to verify encrypted transactions. It has gained traction with merchants selling everything from Sacramento Kings basketball tickets to kitchen mixers on Overstock.com.
The software's defenders say Bitcoin is safer than currencies backed by governments, arguing that virtual payment systems can't be steered by political motives.
"Legacy currencies like euros or dollars are dependent on promises of central banks and politicians," Martti Malmi, a software developer with Finnish firm SC5, who says he's the first Bitcoin developer after Nakamoto and worked with the program in 2009-2011, said by e-mail. "I would advise caution in holding them more than you can afford to lose."
In Sweden, consumers have experienced firsthand some of the risks associated with using Bitcoin. This month Sweden's biggest Bitcoin exchange, Kapiton, was reported to the police and the National Board for Consumer Disputes after a number of users alleged their money had disappeared.
Kapiton's founder referred to on the website only as Sebastian published a statement on Jan. 18 apologizing for "recent problems" and assuring users that no client assets had disappeared. The site is working to match orders with accounts, Sebastian said.
Shrem resigned from the board of Bitcoin Foundation on Jan. 28 after he was charged with conspiring to launder $1 million in the virtual currency, the latest allegations tied to the illicit online bazaar Silk Road.
According to Nommela, Estonia's central bank is also concerned that a Bitcoin account holder "can quickly lose it if for example his or her computer lacks the necessary anti-virus software or recovery options."
As the birthplace of Skype, Estonia has traditionally been open to technological innovations. Citizens are at home with online services, with 95 percent of the country's 2013 tax declarations filed electronically. Some 85 percent use online banking, compared with the European Union average of 48 percent, according to a Eurobarometer study in 2012.
"There are grounds to assume that the use of virtual money schemes will expand in Estonia as well," Nommela said. "Thus the central bank keeps its attention on such schemes."