The Central Bank of Cyprus (CBC) issued a warning on 7th February to its 1.1 million residents advising them that virtual currencies such as bitcoin are not legal tender and should be treated with caution because of their perceived volatility.

The CBC further noted in its statements that it does not condone any activity that falls under its jurisdiction, “unless it can ensure the legality of that activity”. The agency added:

“Activities without the necessary licensing are in breach of legislation.”

Elsewhere, the CBC reminded its citizens to be cautions about virtual currency investments, and to “examine all aspects of the use of virtual currencies” before electing to invest.

The announcement is particularly noteworthy as it comes less a day after Mt. Gox halted withdrawals, causing the price of bitcoin to experience its largest fluctuations in weeks. Further, the Cyprus banking crisis is largely credited with the spike in interest in bitcoin in March of 2013, and the nation is often cited as being a market where a solution such as virtual currency might become widespread.

Lack of regulatory safeguards

The CBC used the release to remind citizens about the volatility of virtual currency. The release included references to the posibility that virtual currency “platforms or exchanges” could collapse, putting citizens at risk.

“In particular, the public should be aware that there are no regulatory safeguards to cover losses from using virtual currency,” the release stated.

The statement went on to name four major risks associated with virtual currencies:

1. There are no consumer protections for those invested in virtual currencies
2. The value of virtual currencies may rise, fall or be eliminated
3. The trade of virtual currencies helps facilitate criminal activities
4. The acceptance of virtual currencies can be revoked at any time.

Fertile ground for bitcoin

The Cypriot government was at the center of international controversy in 2013 after it decided to adopt a “bail-in” strategy to deal with its struggling banks. As part of this initiative, authorities transferred all assets under €100,000 to the CBC and instituted 47.5% losses on deposits exceeding this benchmark.

The announcement sparked outrage on the island nation itself, with many citizens noting they felt as if they were being robbed by their government.

However, bitcoin and virtual currencies soon emerged as a potential solution.

“The most fertile ground for bitcoin is in places like Cyprus, Argentina, Iceland, China and other countries which have experienced significant financial disruptions and/or maintain strict financial controls,” Garrick Hileman, economic historian at the London School of Economics, told CoinDesk this November.

Those with more conservative and libertarian financial ideologies responded as well.

As Guillaume Babin-Tremblay, executive director of the Bitcoin Embassy in Quebec, noted in an article for Forbes:

“Bitcoins were growing slowly until Cyprus. Cyprus was the catalyst for the big increase in the price. The price started trading at about $40 and then doubled within a couple of days.”

Whether this announcement will have any affect on bitcoin’s growth in the country, remains to be seen.

Image credit: Kirenia Castle Harbour, Cyprus via Shutterstock