The regulatory framework for e-money appears to focus on products that are “money”. The main argument in favour of regulation in the 1998 report was that these products would have an impact on monetary stability (i.e. issuing this “money” at a discount would increase the total money supply); The word “exit” also implies this. Electronic money institutions under EMD1 were also treated as “credit institutions” (i.e. they were effectively considered as “bank lenders”). However, while the main concern is domestic monetary policy, the system does not seem to be able to cope with the situation where foreign companies issue e-money in pounds sterling/euro, for example. This is likely to affect the UK/EU money supply, but these companies are not currently subject to UK/EU regulation. Conversely, if UK companies use e-money, for example only in USD, this does not seem to have any effect on the UK monetary aggregate, but these companies are subject to UK approval. Encryption technology, customer authentication technologies (such as multi-factor authentication), and regulatory standards ensure that e-money remains secure even on the web. To prevent identity theft and other cybercrimes related to your e-money wallet, service providers are also required to comply with KYC, fraud prevention, risk protection, and anti-money laundering. In addition, conventional cryptocurrencies are not backed by fiat currency.
So, unlike electronic money, whose fluctuation in value is related to the value of the fiat currency awarded. The value of the cryptocurrency fluctuates as it is determined by supply, demand, and developments in the crypto market. Please note that access to electronic payment services has become a key driver of economic growth in many developing countries. E-wallets are also a great opportunity for people without a bank account to achieve financial independence. Therefore, e-money licenses are in high demand in many countries. For example, the following fintech companies and large technology companies have applied for such a license for the EEA in recent years: It is very important that a third party other than the issuer accepts electronic money. Due to the criterion of so-called third-party acceptance, voucher cards that can only be used in the publisher`s shop are in fact not electronic money. The rules outlined in EMD2 make it clear that e-money must be redeemable. Thus, it can be used in a transactional manner similar to cash. E-money can be used as a means of payment for goods and services as long as its suppliers accept electronic payments.
Many experts believe that electronic money is safer than cash. You cannot misplace it or give more due to a calculation error on the meter. And criminals can`t steal it easily either. So, if your business model revolves around one of these services, you should apply for an e-money license. Some countries even offer the possibility of obtaining a small e-money license, which allows companies to issue e-money, but only in exceptional cases. According to this definition, electronic money is a stored value that generates a claim after it is issued. Like all money in our centralized financial system, e-money retains its value through trust. In the case of electronic money, this trust is supported by stable and well-accepted assets. The issuer only issues electronic money “after receipt of funds”.
This means that all electronic money in circulation comes from fiat money. This increases the likelihood that these “natural and legal persons” will accept payments in electronic money. E-money must be spent “upon receipt” of funds, which means that e-money is paid in advance or “prepaid”. However, payment by credit card or direct debit is usually allowed, even if the money is not immediately credited to the issuer. The monetary value must be stored electronically, including magnetically. This means that e-money is always stored somewhere. This alone does not say much, because electronic money can be stored, for example, on a card (smart card such as the money card) but also on an account and, in the latter case, the difference with an account other than electronic money, which can also have a balance, is not really visible. Electronic money, represented by digital assets stored and transmitted online, is electronic money. However, these two terms cannot be used interchangeably. The e-currency label also applies to cryptocurrencies, certain tokens such as ICOs, or virtual currencies such as monetization currencies for video games. All of these unique variations of digital currency have qualities and applications that set it apart from e-money. The fourth sentence of Paragraph 1(2) of the ZAG provides for exceptions to the definition of electronic money.
Where one of these exceptions applies (which also applies to payment services), the stored value is not considered electronic money. These exceptions mainly concern payment instruments that can only be used for a very limited range of products or only on a limited network. As these exceptions are very relevant in practice, we saved their own home in the Advent calendar. Therefore, all elements of the definition of electronic money are met. Given the current prevalence of online banking/payments (which is expected to increase further with the “Open Banking” initiative under PSD2), this would in turn mean that all UK banks offering online checking accounts could automatically issue e-money. However, such a conclusion seems instinctively wrong, not least because the above example does not appear to raise monetary policy concerns, which is essentially the main rationale for the e-money regime (see discussion below). In addition, it should be noted that UK banks wishing to issue electronic money must be separately authorised to do so and not all UK banks have such authorisation. In any case, electronic money transactions, both hardware and software, do not need to involve banks to process the payment, as long as it is a certified electronic money institution providing the service in question. Q9.
Does the definition of e-money only apply to card-based schemes? Article 17 of EMD2 requires the Commission to review its implementation and propose its revision by 1 November 2012 “if necessary”. The Commission presented the necessary report (COM 2018 41 final) in January 2018, which did not propose significant next steps, but noted that further analysis was needed for a future revision of EMD2 and its merger with PSD2. E-money is not mentioned in the Commission`s 2020 Work Programme. Therefore, subject to the ongoing Brexit negotiations, how to improve the e-money regulatory system could become more of a domestic policy issue for the UK. The European Commission (the “Commission”), the European Central Bank (“ECB”) and the Financial Conduct Authority (“FCA”) of the United Kingdom make it clear in various discussions and guidelines that this definition includes both card-based products and account/server-based products. The definition in the Electronic Money Regulation corresponds to the definition in the Electronic Money Directive. E-money is the monetary value represented by a claim on the issuer, which reads as follows: At this point, we need to distinguish between two forms of use of e-money: software-based e-money products and hardware-based e-money products. Again, a glance at the European Commission`s definition will shed light on the issue.
The regulation states that virtual currencies are: As we have already discussed, electronic money is managed by financial authorities and backed by fiat money. As a result, most of the issuance of e-money falls within the realm of businesses – unlike banks, which can issue e-money due to their full banking licenses. But that`s where the similarities end. Unlike electronic money, cryptocurrencies are not managed by a centralized authority. In “classic” electronic money transactions, a financial institution is supervised as an intermediary. Electronic money institutions must comply with anti-money laundering, fraud and know-your-customer regulations or face legal consequences. Cryptocurrencies as a relatively new technology are not yet widely regulated. A complex decentralized peer system validates and processes cryptographic transactions.
The FCA`s guidance on the distinction between e-money and deposits contains some useful clarifications: “A deposit involves the creation of a debtor-creditor relationship in which the person accepting the deposit stores value for eventual return. Electronic money, on the other hand, involves the purchase of a means of payment. However, this seems to be more intended for comparison with money deposited, say, in a typical savings account, and therefore its usefulness seems limited when applied to the example discussed above. Both the 1998 report and the Commission`s review compared products considered electronic money to products that merely provided “access” to money. These “access products” (e.g. a typical debit card) would allow a customer to access money held elsewhere, but not on the instrument itself, and transactions through the instrument would have to be routed to the issuer for authentication. Hardware-based e-money products do not necessarily require online connections. Instead, the monetary value relies on a physical device called a hardware wallet (i.e. a chip card or prepaid app on a mobile phone). Charging and withdrawing is usually done through a dedicated device reader, while payment is usually made at a specific physical outlet.