The European Banking Authority (EBA) has issued a warning on potential risks related to virtual currencies, but the warning is largely focused on the possibility of fraud and theft.

The authority points out that consumers are not protected by union regulation when they buy, trade or hold virtual currencies such as bitcoin. In addition, the regulator warns that there is no guarantee that currency values will remain stable.

The EBA was apparently prompted to issue the warning due to a sudden increase in virtual currency trading and the fact that virtual currencies are constantly in the headlines.

“Consumers should be aware that exchange platforms tend to be unregulated and are not banks that hold their virtual currency as a deposit. Currently, no specific regulatory protections exist in the EU that would protect consumers from financial losses if a platform that exchanges or holds virtual currencies fails or goes out of business,” the EBA said in a statement.

Furthermore, the EBA stressed that digital wallets are not impervious to hackers and that several cases of consumers losing “significant amounts” of digital currency have already been reported. In addition, people who choose to use virtual currency for commercial transactions are not protected by EU refund laws.

Criminal activities and tax dodging were also addressed. The EBA said the high degree of anonymity offered by virtual currency transactions can be used for nefarious purposes, including money laundering. While this part of the warning shouldn’t cause any concern for the vast majority of bitcoin investors, even they could be affected. The statement continued:

In other words even legitimate businesses and investors could have their bitcoin assets frozen. It is unclear what would happen in that case, as such closures and the associated freeze or seizure of bitcoins would go into uncharted legal territory. This part of the warning could have far reaching implications, adding to the fear, uncertainty and doubt that still surround virtual currencies.

In terms of tax issues, the EBA points out that tax liabilities may apply in certain countries. This of course is regulated by national legislation rather than Union regulation, so bitcoin investors who want to stay on the safe side need to do their homework to make sure they don’t get a visit from the taxman.

Lastly the EBA warns that consumers who choose to buy virtual currencies need to understand them and refrain from investing money they “cannot afford to lose.”

The EBA warning comes hot on the heels of similar warnings and notices issued by the central banks of China, France and New Zealand.