By Huw Jones
LONDON (Reuters) - The European Union will monitor rather than regulate "hyped" virtual currencies for now, because too little is known to justify new rules beyond reining in specific risks like money-laundering, the body's executive said on Monday.
The world's 600 virtual currencies are tiny, with bitcoin alone accounting for 90 percent of the $7 billion sector, compared with daily turnover of about $5 trillion on global foreign exchange markets.
Virtual currencies are traded online and not backed by a central bank. The collapse of bitcoin exchange Mt. Gox two years ago raised concerns about consumer protection in a largely self-regulated, experimental sector.
After the attacks in Paris last November, policymakers also want to ensure that virtual currencies are not used to finance terrorism.
The EU's European Commission has powers to propose bloc-wide rules, but one of its senior financial services officials, Olivier Salles, said his focus was on monitoring rather than proposing new rules.
"It's easy to fail when you regulate, you can be too early and too late. From the European Commission's perspective, we are more on the monitoring side," Salles told a hearing on virtual currencies in the European Parliament.
"We want to understand better what is happening," Salles said.
The EU executive is examining options to prevent activities like money laundering, but "we are not in a hurry" to regulate financial products linked to virtual currencies, he added.
Sean Ennis, an economist at the OECD club of rich nations, said the EU could learn lessons from how Britain has maintained lower regulatory requirements for peer-to-peer lending, enabling the fledgling sector to innovate and grow much faster than in the rest of Europe.
"I am very modest about the potential for regulation," Ennis said, echoing the International Monetary Fund's first paper on virtual currencies published last week.
It said regulatory responses should be in line with risks and not stifle innovation.
Policymakers are turning their attention to the technology underlying the currencies, known as blockchain, which has the potential to shake up the payments system.
Jakob von Weizsaecker, a German center member of the European Parliament, said regulators needed to understand blockchain better before it became more commonly used.
He is compiling a report on virtual currencies, which the commission will study, and said that precautionary monitoring rather than immediate regulation was probably best.
Bitcoin transactions are dominated by about 20 companies, said Jeremy Millar of technology consultants Magister Advisors.
"They are putting in regulatory capital, they are already registered with the regulators, by and large. If the companies and the activities are already regulated, I don't know what it means to regulate the technology," Millar said.
The European Union is due to unveil measures next month to tackle terrorism financing.
(Reporting by Huw Jones; Editing by Katharine Houreld)