The German Federal Ministry of Finance said on Monday that Bitcoin is not a full-fledged currency but that it is permissible to use it in private transactions.
But if companies want to use Bitcoins for commercial transactions, they need the permission of the Federal Financial Supervisory Authority (BaFin), said Martin Chaudhuri, ministry spokesman.
Bitcoin is a digital currency that can be exchanged electronically. But like other virtual currencies it lacks the backing of a government entity or a central bank.
In Germany, Bitcoin is not seen as a real currency by the Ministry of Finance, said Chaudhuri. Bitcoin rather falls under the classification "Rechnungseinheiten als Finanzinstrument" which is a unit of account, he said.
The government clarified its position on Bitcoin at the request of a member of parliament (MP) a couple of weeks ago, said Chaudhuri.
While Bitcoin can be legally used for private transactions in Germany, the Ministry also has the position that the virtual currency has many disadvantages, according to Chaudhuri, noting above all Bitcoin's instability. But because Bitcoins don't have a great impact on the market due to their limited use, the risks are also limited, he added.
Along similar lines, the European Central Bank (ECB) concluded last October that at present, virtual currency schemes such as Bitcoin do not pose a risk to price stability, provided that money creation continues to stay at a low level.
Though virtual currencies tend to be inherently unstable, at the moment they cannot jeopardize financial stability due to their limited connection with the real economy, their trading low volume and lack of wide user acceptance, the ECB said at the time.
But because they are currently not regulated and are not closely supervised, participation in virtual currencies exposes users to credit, liquidity, operational and legal risks, according to the ECB. These currencies could also represent a challenge for public authorities because of the legal uncertainty, it added. And they can also be used by criminals, fraudsters and money launderers to enable their legal activities, the ECB noted.
While the impact of the risks is relatively small, the ECB will periodically revisit developments in virtual currencies to reassess risks.
A similar risk assessment is underway in the U.S. where last week it was revealed that a prominent U.S. Senate committee has launched a formal inquiry to investigate criminal activity and other risks tied to the use of virtual currencies like Bitcoin.