Electronic Money and Relevant Legal and Regulatory Issues(电子货币及相关法律、监管问题)(2000)

I. Introduction

Money has existed in civilisation for thousands years, originating from both economic and non-economic causes such as tribute, trade, blood money, barter and religious rites.1 Primitive money took many forms, from cowrie shells to cattle and whales teeth, and later coinage. The development of money can be divided into four main groups:2 the first is ‘objects-as-money?group which consisting of the first generation (trade by barter) and the second generation (trade with valuable objects); the second is ‘currency-as-money?group which consisting of the third generation (coins) and fourth generation (paper notes); the third is ‘claims-as-money?group which comprising the fifth (deposit accounts), sixth (‘plastic money? and seventh generations (electronic payments (EPs) and electronic fund transfers (EFTs)); and the fourth is ‘electronic-impulses-as-money?group which covering the eighth generation (smart cards) and ninth generation (digital coins). The continued development of money was very much linked to the growth in world trade and commerce. With the onset of the industrial revolution, foreign and domestic trade increased greatly and monetary exchange and payment systems rapidly developed.

The advent of electronic payment can be traced back to 1918, when the Federal Reserve banks of the USA first moved currency via telegraph.3 Electronic payment systems exist in a variety of forms which can be divided into two groups: wholesale payment systems and retail payment systems. Wholesale payment systems exist for non-consumer transactions, high-value wholesale payments flow through the three major interbank funds transfer systems: CHIPS,4 SWIFT5 and Fedwire.6 Retail electronic payment systems encompass those transactions involving consumers. These transactions involve the use of such payment mechanisms as credit cards, automated teller machines (ATMs), debit cards, point-of-sale (POS) terminals, home banking, and telephone bill-paying services. Payments for these mechanisms are conducted online and flow through the check truncation system7 and the ACH.8 A number of innovations are taking place in the area of retail electronic payments known as electronic money (e-money). These innovations, which are still at a relatively early stage of development, have the potential to challenge the predominant role of cash for making small-value payments and could make retail transactions easier and cheaper for consumers and merchants.

It has been suggested that e-money is likely to “lead to a new concept of pocket money, give birth to a new commercial payment system for the Internet, change the way governments pay out benefits electronically, and revolutionize the movement of value over telephone lines and airwaves.?9 The use of e-money in low-value, high-volume transactions opens up a wide variety of new services and changes the way in which old ones can be delivered. However, it seems that e-money products have not yet gained wide acceptance, the reaction to these products around the world has been lukewarm so far. It appears that e-money is ahead of customer demand, for the present time at least. This is due to some concerns about e-money, such as security, privacy and some other issues.

The development of innovative e-money raises numerous legal and regulatory issues that must be addressed. These include finding acceptable methods for authentication and protection of information, accommodating the special needs of law enforcement, and creating the requisite means of settling disputes. This article identifies some key issues raised surrounding e-money and proposes strategies for regulatory control. Part two introduces e-money and its features as well as its impacts on banks. Part three and part four discuss respectively the legal issues on issuing, using and regulating e-money. Part five concludes with some suggestions. [page]

II. Electronic Money

1. What is money?

Money is a medium that people are willing to accept for the goods, securities, and services that they sell. Money serves three purposes.10 First, as just mentioned, it serves as a medium of exchange. Second, as a standard of value, it serves as a measure for the value of a good or service and thus provides a standard for making comparisons between different goods and services. Finally, it functions as a store of value, thus it can be saved and used in the future.

In order to realize its three functions, money possesses certain characteristics which allow it to enable transactions. First, it must be durable to function as a store of value. In other words, when money is not spent, it is retrievable. However, if it is destroyed, stolen, or otherwise lost, it is not replaceable. Second, it must be difficult for individuals to create or counterfeit money. Public trust in money's legitimacy is an essential element of its successful use as a medium of exchange. Third, it must be widely accepted. The larger the community of users who trust and accept money, the more that its value as a medium of exchange is increased. Finally, when it is exchanged, there is anonymity.11

2. What is electronic money?

E-banking as well as e-money are rather generic terms and we need to specify what we are talking about. It is well accepted that e-banking can be separated into two streams: one is e-money products, mainly in the form of stored value products, the other is electronic delivery channel products or access products. The latter are products that allow consumers to use electronic means of communication to access conventional payment services, for example, use of a standard personal computer and a computer network such as the Internet to make a credit card payment or to transmit instructions to make funds transfers between bank accounts. The significant novel feature of these access schemes is the communication method and so they do not raise the same concerns as e-money schemes and are not considered further in this article.

As e-money is still at the early stage of development, there is still no unified definition of e-money. Different person even different bodies have described and categorized e-money products in different ways. The European Commission defined electronic money in its Draft Directive as:12

a. Stored electronically on an electronic device such as a chip card or a computer memory;

b. Accepted as means of payment by undertakings other than the issuing institution;

c. Generated in order to be put at the disposal of users to serve as an electronic surrogate for coins and banknotes; and

d. Generated for the purpose of effecting electronic transfers of limited value payments.

The Consumer Advisory Board of the Federal Reserve Board of the USA described that e-money is money that moves electronically. It can be carried on the persons in the form of a smart card or stored-value cards or electronic wallets. It can be used at the point of sale or it can be used person-to-person directly without the intervention of any outside entity. It can be moved around or spent through telephone lines to banks or other provides or issuers. It can also be moved around or spent through links with interactive cable television and personal computers.13

From the above definition and description, we can conclude that e-money is a "stored-value" or "prepaid" payment mechanism in which a record of the funds or "value" available to a consumer is stored on an electronic device in the consumer's possession. The electronic value is purchased by the consumer and is reduced whenever it is transferred directly to other devices, or the consumer uses the device to make purchases via point of sale terminals or over open computer networks such as the Internet. In contrast to the many existing single-purpose prepaid card schemes (such as prepaid telephone cards), e-money products are intended to be used as a general, multipurpose means of payment.

It is clear that e-money includes both prepaid cards (sometimes called “smart cards? or “electronic purses? and prepaid software products that use computer networks such as the Internet (sometimes referred to as “digital cash?. The most common e-money products are card-based products, industry leaders in this sector being Mondex and VISA Cash. While the Dutch company Digicash first pioneered the software approach. There have been dozens of other e-money products and systems introduced to the public, such as CyberCash, Millicent, Proton, PayPal, eMoneyMail, BillPoint, Payme.com, PayTrust and Propay.14 Although each of them has some different features, they can be included in the above-said two general categories. While each of these products are efficient and innovative, however, so far, most have attracted customers only in limited consumer and business applications. So, I would like to describe below briefly how the major e-money products work.

Mondex was initially invented in 1990 and based in London, it is currently under development in more than 75 countries around the world. It contains a microprocessor chip that could hold and transfer electronic value. By utilising bearer certificates, funds deposited are remotely stored on the users actual card, which is not linked to any central account. In addition, the electronic wallet that accompanied the card allows the value on the card to be transferred from person-to-person indefinitely without any central verification or clearing requirement, making it the closest in operation to real cash. It also has the additional ability to store the recent payment history.15

The Visa Cash is similar to Mondex. However Visa Cash payments are routed through a central facility and cannot be transferred from card to card with the same degree of ease. One major point in its favour is its appeal to banks as it allows them to earn float income, therefore Visa Cash is more attractive from a purely commercial point of view.16

The Digicash Company was based in the Netherlands after being established in 1990 by David Chaum.17 The e-money product of the company was called “eCash? To use eCash, an account should be established at a DigiCash-licensed bank with real money. Once established, the customer can withdraw eCash that is stored on the user computer's hard drive. Using proprietary software, eCash can be spent with an Internet merchant or with anyone else whose computer is set up to deal in eCash. However all such transactions must be made through an intermediary bank. One of the cornerstones of the Digicash system is its insistence on the maintenance of privacy. The system uses “blind signatures?as the way for the issuing bank to certify each token it issues. The actual process requires the customer, not the bank, to generate the eCash token. The customer creates blank tokens and forwards them (hidden in a digital envelope) to the bank for certification. The bank stamps its signature on each token, debits the customers account and sends the token back over the Internet.18 So the digital tokens can be registered and verified by the issuer without revealing to whom it was originally issued. In effect, these digital cash transactions are capable of being as anonymous as cash. Because the system is software based, it is therefore relatively easy to duplicate certified eCash tokens. Therefore to guard against this, any eCash presented for payment is crosschecked with the central registrar to ensure it has not already been spent. It seems it is impractical for most merchants and customers and this has limited its application in the market.

With regard to their potential use and growth, card-based products are being designed to facilitate small-value payments in face-to-face retail transactions and would therefore constitute a close substitute for banknotes and coin. While software-based schemes would be used to make remote payments over computer networks, primarily the Internet. They are likely to substitute for both cash and, to some extent, other cashless payment instruments such as cheques and funds transfers.

3. The key features of e-money

In general, e-money should be characterized as a substitute for currency. As mentioned above, it is a replacement for currency as well as other payment mechanisms such as checks, credit cards, traveler's checks, and debit cards. The key features of e-money are as follows:

Firstly, e-money value is stored electronically on an electronic device, although different products differ in their technical implementation. To store the prepaid value, card-based schemes involve a specialised and portable computer hardware device, typically a microprocessor chip embedded in a plastic card, while software-based schemes use specialised software installed on a standard personal computer.

Secondly, e-money value is transferred electronically in different ways. Some e-money schemes allow transfers of electronic balances directly from one consumer to another without any involvement of a third party such as the issuer of the electronic value. More usually, the only payments allowed are those from consumers to merchants, and the merchants in turn have to redeem the value recorded.

Thirdly, related to transferability is the extent to which transactions are recorded. Most schemes register some details of transactions between consumers and merchants in a central database, which could then be monitored. In cases where direct consumer-to-consumer transactions are allowed, these can only be recorded on consumers' own storage devices and can be monitored centrally only when the consumer contacts the e-money scheme operator.

Fourthly, the number of participants and parties functionally involved in e-money transactions tends to be greater than in conventional transactions. Typically, four types of service provider will be involved in the operation of an e-money scheme: the issuers of the e-money value, the network operators, the vendors of specialised hardware and software and the clearers of e-money transactions. The issuers are the most important providers, while the network operators and vendors only supply technical services, and clearing institutions are typically banks or specialised bank-owned companies that provide a service that is no different from that provided for other cashless payment instruments.

Finally, technical hitches and human errors may hinder or prevent the execution of a transaction to a degree not commonly experienced in relation to paper based transactions.

4. The impacts of e-money on banks

Electronic payment media are likely to figure importantly in the development of electronic commerce, and retail electronic banking services and products, including e-money, could provide significant new opportunities for banks. E-banking and e-money may allow banks to expand their markets for traditional deposit-taking and credit extension activities, and to offer new products and services or strengthen their competitive position in offering existing payment services. In addition, e-banking and e-money could reduce operating costs for banks.

More broadly, the continued development of e-banking and e-money may contribute to improving the efficiency of the banking and payment system and to reducing the cost of retail transactions nationally and internationally. This could potentially result in gains in productivity and economic welfare. It is estimated that an ATM transaction costs about $0.27, a teller generated transaction in a financial institution costs about $1.07,19 and the average cost of swiping a credit card ranges from $0.08 to $0.15.20 While the cost of dipping a smart card, which requires no closed proprietary or open network to transmit its electrons from chip to chip, is less than $0.01, it is widely believed that software-based transactions will cost even less. Moreover, banks pay for their ATMs, and consumers pay for their PCs.21

In addition, e-banks are easy to set up so lots of new entrants will arrive. ‘Old-world? systems, cultures and structures will not encumber these new entrants. Instead, they will be adaptable and responsive. Therefore, e-banking gives consumers much more choice. Consumers and merchants may be able to increase the efficiency and enjoy greater convenience. E-money may also increase access to the financial system for consumers who have previously found access limited.

However, the development of e-banking and e-money is also a new challenge to traditional banks. As mentioned above, e-money transactions are much cheaper than ever. This could turn yesterday’s competitive advantage (a large branch network) into a comparative disadvantage, allowing e-banks to undercut bricks-and-mortar banks. On the other hand, e-banking will lead to an erosion of the ‘endowment effect?currently enjoyed by the major traditional banks. Deposits will go elsewhere with the consequence that these banks will have to fight to regain and retain their customer base. This will increase their cost of funds, possibly making their business less viable. Lost revenue may even result in these banks taking more risks to breach the gap. Portal providers are likely to attract the most significant share of banking profits.

Furthermore, the e-money products will be provided by monolines, experts in their field. Traditional banks may simply be left with payment and settlement business, even this could be cast into doubt. Traditional banks will find it difficult to evolve. Not only will they be unable to make acquisitions for cash as opposed to being able to offer shares, they will be unable to obtain additional capital from the stock market. This is in contrast to the situation for Internet firms for whom it seems relatively easy to attract investment. [page]

III. Legal issues on issuing and using e-money

1. Security

Security issues are a major source of concern for everyone both inside and outside the banking industry. E-money increases security risks, potentially exposing hitherto isolated systems to open and risky environments. All retail payment systems themselves are vulnerable in some way, e-money products raise some more issues such as authentication and non-repudiation, integrity and privacy.

Security breaches could occur at the level of the consumer, the merchant or the issuer, and could involve attempts to steal consumer or merchant devices, to create fraudulent devices or messages that are accepted as genuine, to alter data stored on or contained in messages transmitted between devices, or to alter the software functions of a product. Security attacks would most likely be for financial gain, but could also aim to disrupt the system. Security breaches essentially fall into three categories: breaches with serious criminal intent (e.g. fraud, theft of commercially sensitive or financial information), breaches by ‘casual hackers?(e.g. defacement of web sites or ‘denial of service?- causing web sites to crash), and flaws in systems design and/or set up leading to security breaches (e.g. genuine users seeing / being able to transact on other users?accounts). All of these threats have potentially serious financial, legal and reputational implications.

Therefore, it is crucial important to assess whether the institution's proposed system is sound and the service provided through the Internet will have adequate security. Surely there no absolute security exists in either the electronic or physical world of banking. However, the level of security should be "fit for purpose". The fundamental objectives that security arrangements of e-money products should try to achieve are to:

a. restrict access to the system to those users who are authorised;
b. authenticate the identity and authority of the parties concerned to ensure the enforceability of transactions conducted through the internet;
c. maintain the secrecy of information while it is in passage over the communications network;
d. ensure that the data has not been modified either accidentally or fraudulently while in passage over the network; and
e. prevent unauthorised access to the bank's central computer system and database.

There are specific security features available to protect e-money products, which are perceived to lie in the use of encryption, electronic signatures and, in some cases, in certificates issued by third parties, known as Trusted Third Parties (TTPs). A key safeguard for card-based schemes is to make the microchip embedded in the card tamper-resistant. A critical safeguard for both card-based and software-based schemes is the encryption technology used to authenticate e-money devices and messages and to protect data on the devices from unauthorised alteration. Maximum limits on the amount that can be held on e-money devices and on the transaction value can play an important role in containing losses in the event of a security breach.

The use of all kinds of security tools can provide security that is comparable to that offered in physical transactions. However, as with a physical transaction, the effectiveness of such measures is largely dependent on their proper implementation and the establishment of a set of comprehensive policies and procedures that are rigorously enforced. Continuing developments in security technology are required to maintain the effectiveness of security measures on an ongoing basis as new threats to existing systems arise over time. Banks should accordingly be responsible for ensuring that they keep up with such developments on a continuing basis. Unless they do this, their existing security measures may quickly become obsolete. If security breaches arise from this, it would not only expose the banks to risk of loss, but also more generally undermine the confidence of their customers. All the evidence suggests that security is very much at the forefront of customers' minds in deciding whether to use this new medium.

2. Privacy

As mentioned above, sound practice requires the ability to track and verify that the proper exchanges occur which ensuring that only authenticated parties and payment mechanisms are involved in the exchange, and that they exchange only those items for which they are authorized. However, consumers may fear that their financial, credit and spending information derived from e-money transactions or products could be used without their knowledge or permission. And these fears will be widespread and strongly held when e-banking and the use of e-money becomes more widespread. With the growth of e-money, the spread of crime is likely to accompany the vastly increased storage and transmission of customer financial information. Therefore, many parties want the option of anonymous financial transactions. However, it is difficult to be widely accepted due to security concerns and money laundering. Even so, to achieve widespread confidence, all participants in the system such as banks, other issuers, consumers and merchants, must have certain basic information about the rules governing the use of e-money products. The consumer must be guaranteed that any information exchanged will be transmitted only to properly authenticated parties and only to the extent to which they are authorized to receive the information.

3. Legal risks

Other than the above-said security and privacy concerns, there are also some legal risks surrounding e-money. Legal risk arises from violation of laws, regulations or prescribed practices, such as money laundering, customer disclosures, privacy protection, etc. Legal risk may also arise when the legal rights and obligations of parties are not well established. The contractual and legal relationships between consumers, retailers, issuers and operators might be complex. Schemes differ as to when payment is final and also as to whether the consumer or the merchant bears the credit, settlement and other risks until settlement has occurred. A major concern is whether the rights and obligations of all the parties involved are certain and transparent. For example, issues could arise regarding liability in the event of fraud, counterfeiting, accident or the default of one or more of the participants. [page]

IV. Legal issues on regulating e-money

Traditionally, central banks have four duties: they manage monetary policy, they supervise the payment system, they promulgate regulations, and, in many countries, they supervise the banking system as a whole. Each of these roles is going to be affected by the development of e-money to some extent. Main issues are related to the operation of monetary policy, seigniorage, their oversight function for payment systems and the possible financial risks borne by issuers of e-money. There are also a range of other policy issues such as consumer protection, competition, access and standards. Some of these issues are overlapped, so I would like to discuss some key concern as follows.

1. Do e-money products affect the monetary policy?

The answer is obvious. The introduction of e-money could potentially have an effect on the demand for monetary aggregates and on the formulation of monetary policy. The effects of e-money on the implementation of monetary policy will depend upon whether its primary impact is on the demand for bank reserves or on the central bank’s capacity to supply these reserves.

The most important development in connection with e-money is a reduction in the demand for cash. As cash circulation is a lever by which central banks can control the money and credit expansion of private banks and hence provide some more monetary stability, it is conceivable that a very extensive substitution could complicate the operating procedures used by central banks to set money market interest rates. However, since e-money is expected to substitute mostly for cash rather than deposits, operating techniques need not to be adjusted significantly. On the other hand, with e-money transaction, the whole process including clearing can be carried out in a matter of seconds. Such an acceleration in the circulation rate amounts to an increase in the quantity of money, and increased money circulation could lead to increased inflation.

The effect on supply would result from the impact of e-money on the size of central bank balance sheets, which will depend on the extent that e-money substitutes for cash. Since cash is a large or the largest component of central bank liabilities in many countries, a very extensive spread of e-money could shrink central bank balance sheets significantly. Since banknotes in circulation represent non-interest-bearing central bank liabilities, a substitution of e-money for cash would lead to a corresponding decline in central bank asset holdings and the interest earned on these assets that constitutes central bank seigniorage revenue. And these revenues are large relative to central bank operating costs, as e-money developing, the revenues could be too small to cover the cost of central bank operations.

In principle, central banks have several policy options to reduce the shrinkage of their balance sheets. Firstly, central banks could consider issuing e-money themselves, or issuing e-money without actually operating e-money schemes themselves thus to encourage competition and incentives to innovate. Secondly, central banks could expand the coverage of reserve requirements to cover e-money or other liabilities, and governments could grant the central banks the exclusive right to own and operate the electronic payments network. Thirdly, central banks could issue new liabilities, such as central bank bills, or pay interest on reserve balances in order to induce private banks to hold larger deposits at the central bank. Government entities might also be induced to increase their deposits at the central bank. Finally, as an alternative to these measures, central banks might rely on off-balance-sheet transactions and, in the case of large lender of last resort operations, use private banks as their agents. Furthermore, governments could levy transactions taxes on the use of e-money by charging a tax at the time of issue.

2. Who may issue and distribute e-money products?

With respect to the general regulatory approaches, an important consideration is whether e-money fits within traditional product categories and hence is covered by existing product regulations. For example, if it is decided that e-money balances are a form of deposit,22 any existing regulations concerning deposits are likely to apply. However, even in this case there may be a need to review the regulatory approach, for it does not necessarily follow that the existing regulations will be the most appropriate for e-money schemes.

Who can be allowed (or will be allowed) to issue e-money? There are several possible types of issuer: banks (credit or deposit-taking institutions, defined differently in different countries), other regulated non-bank financial institutions and non-financial institutions. The latter two categories of institution are typically subject to less regulatory oversight than banks. Different countries adopt different opinions on this point.

In the European Union, the European Commission’s stated aim was on the one hand to ensure the stability and soundness of issuers of e-money, while on the other hand ensuring that the failure of one individual issuer does not materially impact on the development of such a means of payment. The proposed framework was thus tailored to the specific nature of e-money services, and to some extent designed to encourage new players to enter the market. The 1994 Report of the European Monetary Institution (EMI) on EU Payment Systems23 first concerned pre-paid cards such as Mondex and Visa Cash, it concluded that e-money issuance should be restricted only to credit institutions as defined by the First and Second Banking Directives with the resultant effect of precluding non-banks. Its conclusions were almost mirrored by the further opinion of the EMI Council on the issuance of e-money published in its 1997 annual report,24 which also concerned software-based e-money systems. In the 1997 report, it stated that: “The funds collected in exchange for electronic money are redeemable by nature, and [such] issuers should be subject to minimum requirements regardless of their status as credit institutions.?/FONT>25

The European Commission published the Proposed Electronic Money Directive in 1998. One of the most important parts of the proposal concerns the plan to amend the definition of credit institution in the First Banking Directive to allow non-banking institutions to issue e-money. Article 4 of the proposed directive sets down limits as to what investments e-money issuers can make with the funds they hold in the “float? all of which are all highly liquid ultra low risk rated. However, the European Council Economic and Social Committee obviously took the view that it was more important to protect consumers and maintain prudential standards, than to open the market place to the largest number of participants possible.

In the United States, it appears that under current state and federal laws, entities other than depository institutions may issue e-money. On May 2, 1996, the Board of Governors of the Federal Reserve published proposed amendments to modify Regulation E’s requirements on stored value cards.26 However, Congress, in an amendment to the 1997 appropriations bill, directed the Federal Reserve to hold off regulating stored value cards under Regulation E for at least nine months, while it studies the impact regulation could have on development.27 And on August 2, 1996, the FDIC issued a legal opinion indicating that most stored value cards do not qualify for deposit insurance.28

Hong Kong is one of the jurisdictions around the world that has chosen to put in place a specific legal framework to deal with the issuance of e-money. This is contained in the Banking Ordinance. The thinking behind the legislation was that the issuance of multi-purpose stored value cards such as Mondex and Visa Cash is an activity akin to the taking of deposits or the issuance of bank notes, and should be confined to licensed banks. On the other hand, non-banks are allowed to issue limited purpose cards which would have a distinct core use, such as payment for transport services, but could also be used for a restricted range of ancillary or incidental purposes. There is provision for the issuers of such cards to be licensed as a special type of deposit-taking company under the Banking Ordinance. If the range of non-core uses is very limited, it can be exempted altogether.

Most of other governments do not generally allow anyone but governmental entities to create money. While private entities are able to create and distribute substitute money products such as traveller’s checks, generally, they are viewed as special purpose instruments and are not used in the same frequency, volume or scale as traditional money. As to the issuance of e-money, it seems that no definitive decision has been reached.

It seems it is a controversial issue. It is difficult and premature to conclude that which model is more appreciate to the development of e-money. In any country, if issuance of e-money is limited to banks, the regulatory framework already in place can be extended to cover the new products but competition and innovation might be more limited. In contrast, if a greater variety of institutions can be issuers, a greater degree of competition could yield commensurate benefits but a number of regulatory issues may be left unresolved. For regulators one key danger is a failure to understand changing risk profiles and vulnerability of individual firms and also changes to market structures and interactions. Regulators must identify, assess, control and monitor the risks associated with e-money. A key issue for central banks is the degree of risk that might be acceptable. This would partly depend on the risk that it would be appropriate for an individual institution to bear. Another consideration would be whether the failure of one participant was likely to threaten the viability of the whole scheme or whether the failure of one scheme could threaten the viability of other schemes or the reputation of electronic payment systems more generally. The speed of the Internet considerably cuts the optimal response times for both banks and regulators to any incident.

Therefore, it is not very important whether issuance of e-money should be limited to banks, it is important that issuance of e-money should be regulated, and issuers must have a comprehensive risk management process which is subject to oversight by central bank. It is essential to regulate not just who can issue e-money but also the types of e-money product that can be offered. For example, restrictions might be placed on the maximum value that consumers and retailers are allowed to hold or on user-to-user transactions, or scheme operators might be required to monitor transactions.

3. Clearing and settlement as well as liquidity and stability issues

Virtually all e-money schemes under development will need inter-institution clearing and settlement arrangements. Many e-money schemes plan to use existing interbank arrangements. Those clearing agents usually require each issuer to maintain an adequate balance between e-money outstanding and the chosen reserve backing. However, if there is a sudden increase in demand for redemption of e-money, it may be a serious problem for the issuer. If public perceives liquidity problems there may be a more widespread withdrawal of deposits or redemption of e-money. Failure to meet redemption demands in a timely manner could also lead to reputation damage. Therefore, regulations and monitoring system on clearing and redemption may be necessary for smooth operation as they provide a safeguard against over-issuance. Other than reserve requirement, issuers should also be required to invest funds in liquid assets and conduct regular and comprehensive audits. Moreover, operators and overseers of interbank clearing and settlement systems need to ensure that such systems are sufficiently robust in terms of institutional and operational arrangements, risk management and settlement procedures. Because e-money allows a transaction to clear almost instantaneously, diligence is required to account for electronic cash and track redemption patterns.

In addition, some schemes might offer e-money in more than one currency, which might, for example, make it more difficult for central banks to measure accurately the stock of e-money denominated in the home currency. Many e-money schemes are being developed on the basis of technology or procedures developed in foreign countries by, for example, large international payment card companies. A concern may be how the public authorities can obtain detailed and precise information about the products or schemes being promoted in their country by foreign vendors, and how they might be able to influence individual schemes in the light of their particular domestic concerns.

4. Fighting improper use of e-money

There are some improper uses of cash which likewise can be replicated by e-money. These include illicit uses, such as transactions in black markets and illegal transactions. Thus, time, attention, and resources may need to be committed to the control and prevention of such serious threats as deception, fraud, embezzlement, and money laundering. Moreover, many of the features relevant to the security of e-money may increase its attractiveness for money laundering and other criminal activities. Its use for such purposes would depend upon the extent to which e-money balances can be transferred without interaction with the system operator, the maximum amount that can be held on an e-money device and its record-keeping capacity, and the ease with which e-money can be moved across borders. Some argue that the interest and activities of governments in fighting money laundering is directly contrary to the interest and activities of those seeking to develop anonymous digital commerce and e-money.29 The UN, G7, EU and a host of supra-national bodies have called for co-ordinated action on stamping out dirty money, and there are over 100 States that either have or are considering the criminalisation of money laundering. These include the tax havens of Europe, the Carribbean and the South Pacific.30 It is required that financial institutions should "know your customer" (which includes an explicit prohibition of anonymous accounts) and to report "suspicious" transactions.31 The European Council Economic and Social Committee felt that card-based e-money and software-based e-money should be regulated separately. This was justified principally by the greater implications for money laundering and fraud presented by the software-based e-money that can be used to transfer any amount, compared to the small transactions carried out using prepaid cards. The Committee proposed that much more stringent regulations be applied to software money issuers.32

Therefore, governments should review the basic legal concepts that define banking and their methods for preventing fraud and unlicensed banking activity. Moreover, because electronic information that is transacted on the Internet shows little respect for national borders, these issues likely will require the coordinated attention of authorities in various countries.

5. International co-operation

As mentioned above, e-money products are based on technology that by its nature is designed to extend the geographic reach of banks and customers. When e-money payments are made across borders (particularly with software-based schemes that operate over computer networks), it may be difficult to establish to what extent e-money schemes fall within the scope of particular jurisdictions. Supervision in today’s global environment can only ever be effective if it has an international dimension. Of course, regulators have already had to deal with the regulatory problems of international banking for a long time. They had set up mechanisms for cross-border supervision; agreements over home/host responsibilities, bilateral agreement for information sharing and general standards by which they expect all banks, including those offshore territories, to abide. However, it is dangerous to expect that this general mechanism for international supervision will be robust enough to work just as well in the e-banking as the physical environment. They should do more.

The Basel Committee E-Banking Group believes that Basel should provide the international supervisory community with a broad set of advisory guidance with respect to e-banking, thereby providing a basis for domestic regulation and supporting consumer and industry education.33 Globally, such guidance would assist international co-operation and act as a foundation for a coherent approach to supervising e-banking and e-money. It could facilitate international e-banking and e-money by creating consumer confidence in sound banks based in different, possibly less satisfactory, regimes and might dissuade host supervisors from imposing additional, potentially draconian, regulation on such banks. The Group identified authorisation, prudential standards, transparency, privacy, money laundering, and cross border supervision as issues on which they felt that there is need for further work, both at the analytical and policy level before any such guidance could be developed.34 [page]

V. Conclusion

Designing an appropriate regulatory framework for e-money involves balancing different objectives including the system stability and security, financial integrity of the issuers, protection of consumers and the promotion of competition and innovation. Therefore, in general, the framework should be e-neutral. However, at the early stage, without any successful experience, authorisation and supervisory regime for e-banking and e-money would be similar to that for conventional banking service and products, just as HK has adopted,35 and it should be adjusted and readjusted following the development of e-money.

Regulatory authorities also face a choice concerning the timing of the introduction of any possible regulatory measures. On the one hand, establishing a comprehensive regulatory framework at an early stage would risk stifling innovation. Although Greenspan, the chairman of the Federal Reserve Board of the USA, recognized that in the current period of change and market uncertainty, there may be a natural temptation for the regulators and a natural desire on the part of some market participants, to have the government step in and resolve the uncertainty, through standards, regulation, or other government policies, he still stressed that as financial systems become more complex, detailed rules and standards have become both burdensome and ineffective, if not counterproductive. He argued that if we wished to foster financial innovation, we must be careful not to impose rules that inhibit it. To develop new forms of payment, the private sector will need the flexibility to experiment, without broad interference by the government. Hence, in the earlier period, industry participants may find that self-policing is in their best interest. 36

However, on the other hand, there may be a risk that the overall cost of regulation will be significantly higher were there to be a substantial delay in implementing measures that ultimately prove necessary, and existing regulatory framework could somehow inhibit desirable innovations by not adapting quickly enough. As Mr. Padoa Schioppa, of the Bank of Italy, has said, “the road to define a new institutional model must be different from the ones adapted in the past. At the beginning of this century, an agreement on how to manage a monetary system based on currency and deposits was only reached after a financial and monetary crisis. It would be extremely dangerous to pass through a similar learning process today, not least because payment systems in the industrialised world would amplify the problems of any single market operator, diffusing its effects to the whole economy?37

It is true that the regulation and supervision of e-banking and e-money is still at an early stage, like the product itself, and is still evolving. However, governments should not therefore adopt a wait and see approach towards legislating for it, which is especially true if you agree with the somewhat extreme view of David Saxton who claims “Digital cash is a threat to every government on this planet who wants to manage his own currency?/FONT>38


1.Thomas P. Vartanian, The Future of Electronic Payments: Roadblocks and Emerging Practices, available at http://www.ffhsj.com/bancmail//bmarts/roadblck.htm
2.Thomas P. Vartanian, Key Question for Emerging Systems: Where is the Money?, Am. Banker, June 17, 1996, available in 1996 WL 5565107.
3.Thomas P. Vartanian, The Emerging Law of Cyberbanking: Dealing Effectively with the New World of Electronic Banking & Bank Card Innovations, available at http://www.ffhsj.com/bancmail/tpvcon.htm
Andreas Furche & Graham Wrightson, Computer Money: a Systematic Overview of Electronic Payment Systems, dpunkt, 1996
4.DICKIE, Internet and Electronic Commerce Law in the European Union, Hart Publishing, Oxford, 1999
5.Alan L Tyree, Virtual Cash ?Payments on the Internet, (1996) 7 Journal of Banking & Finance Law and Practice, 35, 139, 233
6.Alan L Tyree, Smart Card, (1995) 6 Journal of Banking & Finance Law and Practice, 297
7.The Federal Reserve Bank of Minneapolis, The History of Money, available at http://woodrow.mpls.frb.fed.us/econed/curric/history.html
8.Craig D Manson, Electronic Money And its Legal Implications Within The UK, available at http://www.electronic-money.co.uk/Diss2.htm
9.Olivier Hance and Suzan Dionne Balz, The New Virtual Money: Law and Practice, 423 Kluwer Law 1999
10.BIS Publications, Risk Management for Electronic Banking and Electronic Money Activities, March 1998, available at http://www.bis.org/publ/bcbs35.htm
11.Juergen Seitz and Eberhard Stickel, Internet Banking - An Overview, available at http://www.arraydev.com/commerce/JIBC/9801-8.htm
12.M Stathopoulos, Modern Techniques for Financial Transactions and their Effects on Currency: General and National Reports, Kluwer Law International (1995) 1
13.Randall W. Sifers, Regulating Electronic Money in Small-Value Payment Systems: Telecommunications Law as a Regulatory Model, available at http://www.taxi-l.org/emoney.htm
14.OLUJOK? E AKINDEMOWO, The Fading Rustle, Chink and Jungle: Electronic Value and the Concept of Money, UNSW Law Journal, available at http://www.law.unsw.edu.au/unswlj/ecommerce/akindemowo.html
15.2 Furash & Company, Banking's Role in Tomorrow's Payment System Overview 1, 29 (1994)
16.Carol Sergeant, E BANKING: RISKS AND RESPONSES, available at http://www.fsa.gov.uk/pubs/speeches/sp46.html
17.David Carse, The Regulatory Framework of E-banking, available at http://www.info.gov.hk/hkma/eng/speeches/speechs/david/speech_081099b.htm
18.Kelly Holland and Amy Cortese, The Future of Money, Business Week, June 1995
19.Loretta J. Mester, The Changing Nature of the Payments System: Should New Players Mean New Rules, Bus. Rev. (Fed. Res. Bank of Philadelphia), March/April 2000
20.D Stewart, The Future of Digital Cash on the Internet, J.I.B.C. available at http://www.arraydev.com/commerce/JIBC/9703-02.htm
21.HICKEY, E-commerce: Law, Business and Tax Planning, Jordans, Bristol, 2000
22.Robert Hettinga, Internet Banking and Commerce: Security, available at http://www.arraydev.com/commerce/JIBC/9601-2.htm
Alan Greenspan, Regulating Electronic Money, available at http://cato.org/pubs/policy_report/cpr-19n2-1.html
23.Mauro Cipparone, The Role of the Central Bank in the Growing Industry of Internet Payments, available at http://www.arraydev.com/commerce/JIBC/9605-6.htm

1 Davies Glyn, A history of money from modern times to the present day, 1996

2 M Stathopoulos, Modern Techniques for Financial Transactions and their Effects on Currency: General and National Reports, Kluwer Law International (1995) 1 at 3-11.

3 Geoffrey Turk, Money and Currency in the 21st Century, recited from Craig D Manson, Electronic Money And its Legal Implications Within The UK, available at http://www.electronic-money.co.uk/Diss2.htm

4 The Clearing House Interbank Payment Systems (CHIPS) is a private sector system owned and operated by the New York Clearing House Association, which is an online, real-time electronic payment system that transfers and settles transactions. See 2 Furash & Company, Banking's Role in Tomorrow's Payment System Overview 1, 29 (1994), at 3, 61-63.

5 The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a not-for-profit cooperative with headquarters in Brussels, Belgium. SWIFT is actually a financial messaging system rather than a payments system. The system facilitates interbank transfer of information but presupposes a separate system for effecting the payment. See id. at 2, 55-57.

6 Fedwire is a real time payments system operated by the Federal Reserve of the USA for financial institutions that have either reserve or clearing accounts at a Federal Reserve Bank. See id. at 2, 45-47.

7 Check truncation is a hybrid paper/wire transfer system that provides for the interruption of the transfer of the paper and the substitution for it by an electronic transfer. See id. at 13-16.

8 The ACH payment mechanism was established as an electronic alternative to the traditional paper based check collection system. Today it is used to conduct high volume repetitive transactions such as those involved in direct deposits, social security payments, and automatic bill-paying services. See id.

9 Thomas P. Vartanian, Key Question for Emerging Systems: Where is the Money?, Am. Banker, June 17, 1996, available in 1996 WL 5565107.

10 The Federal Reserve Bank of Minneapolis, The History of Money, available at http://woodrow.mpls.frb.fed.us/econed/curric/history.html (visited Oct. 8, 2000)

11 Randall W. Sifers, Regulating Electronic Money in Small-Value Payment Systems: Telecommunications Law as a Regulatory Model, available at http://www.taxi-l.org/emoney.htm (visited Oct. 18, 2000)

12 Draft Directive Article 1(3) 1.2(b)

13 Transcript of the Federal Reserve Board Consumer Advisory Council Meeting, Nov. 2, 1995 at 35.

14 Thomas P. Vartanian, The Future of Electronic Payments: Roadblocks and Emerging Practices, available at http://www.ffhsj.com/bancmail//bmarts/roadblck.htm

15 Mondex homepage http://www.mondex.com

16 VISA Cash homepage http://www.visa.com/pd/cash/main.html

17 DigiCash homepage http://www.digicash.com. Unfortunately the company collapsed in November 1999.

18 D Stewart, The Future of Digital Cash on the Internet, J.I.B.C. available at http://www.arraydev.com/commerce/JIBC/9703-02.htm

19 Loretta J. Mester, The Changing Nature of the Payments System: Should New Players Mean New Rules, Bus. Rev. (Fed. Res. Bank of Philadelphia), March/April 2000, at 3. See also Thomas P. Vartanian, Robert H. Ledig, & Lynn Bruneau, 21st Century Money, Banking & Commerce 286 (1998).

20 Kevin P. Sheehan, Electronic Cash, Banking Rev. (FDIC) 1 (Vol. II, No. 2 1998).

21 Thomas P. Vartanian, The Emerging Law of Cyberbanking: Dealing Effectively with the New World of Electronic Banking & Bank Card Innovations, available at http://www.ffhsj.com/bancmail/tpvcon.htm, recited from Jon Auerbach, Microsoft Now Seeks Friendly Footing with Nation's Big Banks, THE BOSTON GLOBE, Jan. 2, 1996, at 45.

22 Some argue that the money received by the issuer of an electronic purse is a bank deposit. It is indeed a claim which the card-holder (or account holder) has on a third party and which can be used to make cashless payments to a wide range of providers of goods and services. Such deposits contrast with deposits which are payments in advance for which the range of goods or services to be purchased is well defined and limited in scope. See Working Group on European Union Payments Systems, Report to the Council of the European Monetary Institute on Prepaid Cards 7 (1994). Recited from Randall W. Sifers, Regulating Electronic Money in Small-Value Payment Systems: Telecommunications Law as a Regulatory Model, available at http://www.taxi-l.org/emoney.htm. Some argue that non-account e-money actually constitutes a form of bond because e-money constitutes a promise that the electronic currency presented for payment, will be redeemed by the issuer, with the strength of such a promise depending on the reputation and financial situation of the issuer. See Hugh Piggot, Electronic Cash and Payment Systems: Digitising the Future. Recited from Craig D Manson, Electronic Money And its Legal Implications Within The UK, available at http://www.electronic-money.co.uk/Diss2.htm

23 Report to the Council of the European Monetary Institute on prepaid cards May 1994

24 Published May 1998, available at http://www.ecb.int/emi/pub/pdf/ar97/en_ar97.pdf.

25 Olivier Hance and Suzan Dionne Balz, The New Virtual Money: Law and Practice, 423 Kluwer Law 1999

26 61 Fed. Reg. 19,696 (1996).

27 Omnibus Consolidated Appropriations Act, 1997, Pub. L. No. 104-208, 2601, 1996 U.S.C.C.A.N. (110 Stat.) 1363.

28 Notice of FDIC General Counsel's Opinion No. 8, 61 Fed. Reg. 40,490 (1996).

29 Robert Hettinga, Internet Banking and Commerce: Security, available at http://www.arraydev.com/commerce/JIBC/9601-2.htm

30 Ibid.

31 Ibid.

32 1999/C 101/15

33 BIS Publications, Risk Management for Electronic Banking and Electronic Money Activities, March 1998, available at http://www.bis.org/publ/bcbs35.htm

34 Basel Committee on Banking Supervision published Electronic Banking Group Initiatives and White Papers in October 2000.

35 David Carse, The Regulatory Framework of E-banking, available at http://www.info.gov.hk/hkma/eng/speeches/speechs/david/speech_081099b.htm

36 Alan Greenspan, Regulating Electronic Money, available at http://cato.org/pubs/policy_report/cpr-19n2-1.html

37 Recited from Mauro Cipparone, The Role of the Central Bank in the Growing Industry of Internet Payments, available at http://www.arraydev.com/commerce/JIBC/9605-6.htm

38 See Kelly Holland and Amy Cortese, The Future of Money, Business Week, June 1995 at 66 (quoting David Saxton, Executive Vice President of Netl, an electronic check communications company)

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