Slide 7 of 9
Regulation of electronic money
In most jurisdictions electronic money is not regulated. National laws usually prohibit the issuance of notes or coins, but electronic money has no physical existence and cannot fall within that legislation. Neither is it a deposit - the issuer does not promise to repay it, and in some systems keeps no account of the money issued to a particular customer. Instead, there is merely a promise to accept it for deposit into a normal account. The exceptions to this are those jurisdictions, such as the Netherlands, which define the regulated area (normally banking) sufficiently widely to cover payment services. In most jurisdictions, however, it is only the acceptance of deposits which subjects an institution to banking regulation.
Nonetheless, the potential for systemic failure of financial markets caused by a malfunctioning electronic money system is clear. The first detailed proposals to bring it within regulation come from the European Union, whose draft directive proposes to require prior authorisation of electronic money issuers, and to regulate and supervise them on the same principles as for banks. The main difference is that capital and liquidity requirements will be much lower, so as not unduly to discourage market entry.
Because banks who issue or deal in electronic money will necessarily need to meet the higher capital and liquidity requirements, electronic money issuing will be more economic for non-banks. It must also be recognised that there is no effective way of preventing the use of electronic money issued by a non-EU unregulated organisation, other than by prohibiting its acceptance by a bank for deposit.