Evolution of Electronic Money Regulations: Insights into E-Money Business and Legal Definitions in the EU Framework

Josef Bergt
2023

Introduction

In the constantly evolving landscape of financial technology, the concept of electronic money (E-money) has emerged as a pivotal element, significantly influencing both the regulatory and practical aspects of monetary transactions. This analysis aims to dissect and elucidate the intricate legal evolution and current framework of E-money, particularly focusing on the European Union (EU) legal perspectives of Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions (E-Money Directive 2 or EMD2). By delving into the historical development, definitional nuances, and the regulatory architecture, this article seeks to offer insights for legal professionals, financial institutions, and academics.

The Conceptual Genesis and Evolution of E-Money

• Historical Perspective of E-Money
  • The term E-money, a technically crafted term based on EU legal mandates, encapsulates specific facets of the broader economic phenomenon of electronic money. The legal definitions of "electronic money" and E-money institutions were established, implementing the minimally harmonizing First E-Money Directive 2000/64/EC. This consolidation reflected a preemptive approach to the eventual broader regulatory landscape. The legislative intent was to regulate electronic wallets or money cards as well as prepaid electronic "payment units," occasionally likened to electronic notes or coins.

Transition and Expansion with the Second E-Money Directive

The enactment of the Second E-Money Directive on April 30, 2011, further evolved the legal landscape. This legislation removed the E-money business from the catalog of banking transactions and introduced modified provisions. Notably, the administration of E-money ceased to be an additional transactional characteristic, aligning with the fully harmonizing nature of EMD2.

The Current Legal Framework of E-Money

• Definition and Scope of E-Money Business
  • The E-money business primarily involves the issuance of E-money. This definition forms the basis for every norm that pertains to E-money business.
  • The foundational definition of E-money, subject to the limitations (area exceptions), encompasses any electronically, including magnetically, stored monetary value in the form of a claim against the issuer. It is issued against the payment of a monetary amount to facilitate payment transactions and is accepted by parties other than the issuer.

The Essence of Monetary Value in E-Money:

At its core, E-money represents a monetary value, a term encompassing all forms of payment means. Beyond legal tender, it includes any medium of exchange accepted universally or within specific socio-cultural contexts or under multilateral agreements for particular goods or services. 

Requirement of a Claim Against the Issuer:

The monetary value in E-money must embody a claim against the issuer. This claim often arises from an agreement between the issuer and the customer, establishing a customer's claim on the issuer and permitting its transfer to third parties who accept it as a payment medium. Even when the issuer is obligated only to third parties (service providers or acceptors), the monetary value represents the third parties' claim on the issuer upon receiving it from the customer. 

Issuance Against a Payment of Money:

The monetary value must be issued against a monetary payment. This includes legal tender or privately issued payment means that qualify as E-money. E-money is always derived from legal tender or other E-money that, in turn, originates from legal tender. However, monetary values issued gratuitously by the issuer, like in the case of electronic gift vouchers or bonus points, do not qualify as E-money. If monetary values can be purchased for a monetary payment, even previously gratuitously issued values may qualify as E-money. This also applies to discount systems where acceptance points focus solely on redemption and not issuance.

Exclusion of Non-Monetary Barter and Private Creation:

Monetary units created in barter clubs, private exchange rings, or other payment systems in exchange for real economic services, goods, or services, or those generated in computer networks like Bitcoins, do not legally qualify as E-money. 

Storage Medium for Monetary Value:

Electronic storage refers to the representation of a customer's claim for a specific service against the issuer, encompassing magnetic storage of monetary value. Suitable storage mediums include various electronic devices such as magnetic stripe or chip cards, computer hard drives, central servers, or storage cards in mobile devices.

The location of the storage medium, whether in the customer's possession or on the issuer's or an external service provider's server, is irrelevant for classification purposes. Similarly, the storage format is not critical; it suffices to record the total monetary value owed to a customer, regardless of whether individual values are stored separately or collectively.

The specific identification of the customer is not mandatory. For instance, it is sufficient if the storage medium records that a certain number of monetary values are assigned to the holder of a specific card.

Facilitation of Payment Transactions:

Payment transactions encompass all forms of money provision, transmission, or withdrawal, regardless of the underlying legal relationship between the payer and payee.

Broad Interpretation of Conducting Payment Transactions:

The concept of conducting payment transactions adopts a broad interpretation, referring to any transfer of monetary values from the customer to the acceptor, irrespective of the legal relationship that obligates the customer to pay the service provider.

Requirement for Third-Party Acceptance:

The monetary value must be accepted as a payment medium by entities other than the issuer, such as legally distinct third parties. This can include various business structures, such as parent and subsidiary companies or franchise networks. The monetary values can also be accepted by the issuer if third-party acceptance exists.

Issuance of E-Money

Issuance involves a central entity establishing the monetary value by binding itself contractually as the obligor to the holder (beneficiary, customer) of the monetary value. This entity might also operate the E-money business. The legal form of this central entity is immaterial; it can range from individuals, partnerships, corporate structures, to legally non-recognized entities.

Exclusions from the Issuer Concept:

Entities merely administering E-money on behalf of the issuer or traders acquiring it for resale are not considered issuers. 

Directive's Scope Limited to Authorized E-Money Issuers:

The directive is intended to apply exclusively to payment service providers authorized to issue E-money. Monetary value stored on instruments meant solely for purchasing goods or services within the issuer's premises, or under a specific business agreement for a limited network of service providers or a very limited range of goods or services, does not constitute E-money under this law.

Source: BaFin Factsheet Information on the Payment Services Supervision Act (ZAG)

Executive Summary:

• The legal evolution of E-money in the EU reflects a dynamic interplay between technological advancements and regulatory responses.
• The current legal framework provides a clear, yet complex, definition and scope of E-money, necessitating specialized understanding for effective compliance and utilization.
• The ongoing developments in digital finance may prompt further legislative and regulatory adjustments, underscoring the need for continuous monitoring and adaptation by legal and financial professionals.
• Current Legal Framework of E-Money:
  • Definition and scope focusing on the issuance of E-money.
  • E-money defined as electronically stored monetary value issued against payment in the form of a claim against the issuer to facilitate payments and is accepted by entities other than the issuer.
• Monetary value as the core of E-money, encompassing all forms of payment means.
• Requirement for the monetary value to represent a claim against the issuer.
• Issuance of monetary value must be against a payment of money, excluding gratuitously issued values.
• Exclusions and Special Cases:
  • Non-monetary barter and private creation of monetary units (e.g., Bitcoins) do not legally qualify as E-money.
• Technical Aspects of E-Money:
  • Electronic storage includes various mediums and is not limited by location or storage format.
• Broad interpretation of conducting payment transactions, covering all forms of money transfer regardless of the legal relationship.
• Directive's Scope and Exemptions:
  • Limited to payment service providers authorized to issue E-money.
  • Specific exclusions for monetary value used within limited networks or for a limited range of goods/services.