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The European Central Bank has constructed a detailed report on virtual currencies. It is written from a neutral point of view and outlines all the requirements for what a virtual currency is and how it operates. The report provides two case studies: Bitcoin and Second Life's Linden Dollars. I have addressed similar concerns in previous articles, but most of my concerns have been about the dynamics of what drives the supply and demand of the currencies and related economies. The ECB have considered these currencies from a legal / legitimacy aspect, they have enumerated the key risks / behaviour and legal factors surrounding virtual currencies and therefore have outlined what the necessary criteria are, in their eyes, for a currency to be accepted as a ''real'' currency. While there is some contention, there is not a great deal of contention with the points raised in the article. Download a copy directly from the ECB here: ECB report on virtual currencies (pdf).

This is perhaps the most high profile review of the Bitcoin currency, at least in the public domain. There was supposedly a presentation given to the CIA but obviously no further details will be found until they decide to official make a statement about the currency. It is a well written and constructed report. They have researched the topic well and provide numerous references for their statements. They seem to understand why the currency was created and how it is supposed to work. There is very little to fault the ECB with in this article (nothing major, imo).

One part which is particularly nice is that they actually acknowledge the innovation of the currency itself; some detractors say that Bitcoin offers nothing  in terms of innovation, but it isn't always about the ingredients but about the recipe that makes something new. The ECB definitely recognise this.

While it is mostly uncontentious, there are a few points that would be worth addressing: the various risks assigned to Bitcoin. It is hard to accurately discern what proportion of these risks are a result from the lack of popularity with Bitcoin. They mention liquidity and operational risks but minor/ exotic ''real'' currencies can also carry similar risks. They don't quite seem to draw that parallel.

While the Shamir paper was met with fair amounts of admiration it was also met with some disdain; this report, however, has been unanimously welcomed from the Bitcoin community. For example, see the Bitcoin Talk forums: 2012-10-29 European Central Bank - Virtual Currency Schemes

The crux of their investigation is as follows (from the report):

A preliminary assessment is presented of the relevance of virtual currency schemes for central banks, paying attention mostly to schemes which are more open and linked to the real economy (i.e. Type 3 schemes). The assessment covers the stability of prices, of the financial system and of the payment system, looking also at the regulatory perspective. It also addresses reputational risk concerns. It can be concluded that, in the current situation, virtual currency schemes:

- do not pose a risk to price stability, provided that money creation continues to stay at a low level;

- tend to be inherently unstable, but cannot jeopardise financial stability, owing to their limited connection with the real economy, their low volume traded and a lack of wide user acceptance;

- are currently not regulated and not closely supervised or overseen by any public authority, even though participation in these schemes exposes users to credit, liquidity, operational and legal risks;

- could represent a challenge for public authorities, given the legal uncertainty surrounding these schemes, as they can be used by criminals, fraudsters and money launderers to perform their  illegal activities;

- could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly;

- do indeed fall within central banks’ responsibility as a result of characteristics shared with payment systems, which give rise to the need for at least an examination of developments and the provision of an initial assessment.

This report is a first attempt to provide the basis for a discussion on virtual currency schemes.