  We develop the first basic Operational Risk perspective on key risk
management issues associated with the development of new forms of electronic
currency in the real economy. In particular, we focus on understanding the
development of new risks types and the evolution of current risk types as new
components of financial institutions arise to cater for an increasing demand
for electronic money, micro-payment systems, Virtual money and cryptographic
(Crypto) currencies. In particular, this paper proposes a framework of risk
identification and assessment applied to Virtual and Crypto currencies from a
banking regulation perspective. In doing so, it addresses the topical issues of
understanding important key Operational Risk vulnerabilities and exposure risk
drivers under the framework of the Basel II/III banking regulation,
specifically associated with Virtual and Crypto currencies. This is critical to
consider should such alternative currencies continue to grow in utilisation to
the point that they enter into the banking sector, through commercial banks and
financial institutions who are beginning to contemplate their recognition in
terms of deposits, transactions and exchangeability for fiat currencies.
  We highlight how some of the features of Virtual and Crypto currencies are
important drivers of Operational Risk, posing both management and regulatory
challenges that must start to be considered and addressed both by regulators,
central banks and security exchanges. In this paper we focus purely on the
Operational Risk perspective of banks operating in an environment where such
electronic Virtual currencies are available. Some aspects of this discussion
are directly relevant now, whilst others can be understood as discussions to
raise awareness of issues in Operational Risk that will arise as Virtual
currency start to interact more widely in the real economy.

Risk Management;Cryptography and Security;Economics