Europe's banking watchdog has turned a spotlight on the perils of the virtual currency bitcoin, pinpointing the lack of consumer protection laws and the vulnerability of virtual currencies to hacking.

The London-based European Banking Authority also warned that because transactions are conducted with a high degree of anonymity, virtual currencies may be misused for criminal activities and money-laundering. "We recommend that if you buy virtual currencies...you should not use 'real' money that you cannot afford to lose,"...