25 January 2017

VOX: Electronic money versus money: An assessment of regulation

Electronic money can be seen simply as a technological innovation for holding and accessing regular money. This column argues that how it is used and regulated will determine whether e-money instead serves as a replacement for existing money, and discusses the regulatory implications.

The Committee on Payment and Market Infrastructures – the international standard setter for payment systems – defines electronic money (e-money) as “value stored electronically in a device such as a chip card or a hard drive in a personal computer” (CPSS 2003), and the GSM Association – the trade body that represents mobile money operators globally – further indicates that “the total value of e-money is mirrored in (a) bank account(s), such that even if the provider…were to fail, users could recover 100% of the value stored in their accounts” (GSMA 2010).

These features are integral to e-money regulations worldwide, which refer to e-money as a prepaid payment instrument issued against the receipt of funds whose value is either stored on a device in the possession of customers or is accessible from customers when it is stored elsewhere (e.g. a computer server or network). The functionality thus described, however, is analogous to accessing accounts held at banks, which represent claims on funds that customers may exercise at any time. From this perspective, e-money is nothing but a convenient technology for customers to access these funds, quite akin to online banking, swiping a card at merchant establishments, or making ‘card-not-present’ transactions.

The question of whether e-money is money proper should be approached from an evolutionary perspective, whereby people over time determine the ‘moneyness’ of any given commodity or financial instruments. E-money may at some point become money in people’s perception, and regulations should be designed with that prospect in mind. 

The regulatory framework would offer customers a broader choice of e-money instruments than currently available (from those granting full protection against liquidity and credit risks to those giving access to lending facilities), and would allow e-money to become not only a transaction device but potentially a saving instrument as well, with relevant potential financial inclusion implications.

Finally, such a framework would incentivise banks and non-banks to exploit their own comparative advantage, with non-banks possibly competing on the segment of fully protected e-money and banks being able to replicate on the e-money side their power to create money via lending.

Full article

© VoxEU.org