Extract Chapter III.2 from 1997 Annual Report of the EMI. ^Ed

2. Electronic money

At present, electronic money is not a widespread phenomenon. However, the possibility that its development could be more pronounced in the long run cannot be ruled out. Since the publication of the "Report to the Council of the EMI on Prepaid Cards" in May 1994, not only has the number of multi-purpose prepaid card projects greatly increased, but the use of electronic money for payments via computer networks (so-called network money) has also started to develop.

In 1997 the EMI therefore carried out a further study on the impact on EU economies of the emergence of electronic money. It took particular account of new market developments and conducted a thorough analysis of their implications for monetary policy. The results of the study provided the basis for the "Opinion of the EMI Council on the issuance of electronic money" of 2 March 1998, which was transmitted to the Commission, the text of which is reproduced in Box 3 below.

Box 3

Opinion of the EMI Council on the issuance of electronic money ¹

At the present juncture, electronic money is not a widespread phenomenon. However, in the long run a more pronounced development of electronic money cannot be ruled out.

The issuance of electronic money is likely to have significant implications for monetary policy in the future. Therefore, EU central banks regard it as important to establish clear rules on the conditions under which electronic money can be issued.

In 1994 the EMI Council recommended that only credit institutions (according to national law) should be allowed to issue multi-purpose prepaid cards. ² However, this recommendation was not implemented in all Member States. Against this background, the European Commission started in 1997 to work on a proposal for a European Parliament and Council Directive on the issuance of electronic money by non-credit institutions, in particular with the objective of granting the European passport to these institutions.

In the light of the developments over the past few years and further reflection on the matter, not least with respect to monetary policy effectiveness and considerations of level playing-field, and considering that funds collected for issuing electronic money are by nature redeemable, the EMI Council regards as essential that the following minimum requirements be fulfilled, regardless of the nature of the issuer of e-money:

the meaning of "electronic money" must be clearly defined and distinguished from "single-purpose" or "limited-purpose" prepaid cards;

issuers of electronic money must be subject to prudential supervision;

the issuance must be subject to solid and transparent legal arrangements, technical security, protection against criminal abuse, and statistics reporting;

a legal requirement must be imposed that electronic money is redeemable at par, implying that issuers must be in a position to convert electronic money into central bank money on request of the holder of the electronic money; ³

the possibility must exist for central banks to impose reserve requirements on all issuers of electronic money, in particular in order to be prepared for a substantial development of electronic money with a material impact on monetary policy.

In addition, an insurance scheme for electronic money schemes could be envisaged as a way to protect the public.

Against this background, and in line with the 1994 recommendation of the EMI, the most straightforward solution would be to limit the issuance of electronic money to credit institutions, as this would avoid changing the existing institutional setting for monetary policy and banking business. More specifically, with a view to the transition to Monetary Union, the issuance of electronic money should be limited to "credit institutions as defined in Article 1 of the First Banking Co-ordination Directive" since Article 19.1 of the Statute of the ESCB, in its current wording, allows the ECB to impose reserve requirements only on these institutions in Stage Three of EMU.

At the same time, the EMI Council acknowledges that the definition of "credit institution" of the First Banking Co-ordination Directive requires an institution to "receive deposits or other repayable funds from the public and grant credit for its own account". ⁴ The EMI would see great merit in pursuing an amendment to the First Banking Co-ordination Directive's definition of "credit institution" to allow institutions which are not willing to enter into credit operations to issue electronic money. This would provide a level playing-field, in particular as it would ensure that all issuers of electronic money would be subject to an appropriate form of prudential supervision and fall under the range of institutions potentially subject to ECB reserve requirements.

Yet, as a transitional provision until the First Banking Co-ordination Directive is amended, the EMI Council would accept that those institutions already issuing electronic money, but which do not fall under the definition of credit institution in the First Banking Co-ordination Directive, could continue to provide domestic payment services provided they are subject to the regulations as defined in item 4 above, excluding, however, reserve requirements. ⁵

Given the world-wide aspects of the issuance of electronic money, in particular network money, which carries the risk of delocation, the EMI stresses the need for international co-ordination in this field.

Notes:
1. The opinion was adopted by a large majority of EMI Council members, with the exception of Denmark, Sweden, the United Kingdom and Luxembourg.

2. The EMI's 1994 "Report to the Council of the EMI on Prepaid cards" (p. 8) foresaw the possibility of allowing some non-fully fledged credit institutions to issue multi-purpose prepaid cards under specific conditions in exceptional circumstances (e.g. in the case of schemes already in operation before the policy conclusions of the report were drawn up).

3. The details of such a redeemability requirement have yet to be specified. (To avoid burdensome procedures, one may, for example, consider imposing a fee or a threshold on minimum amounts before redemption can be demanded by the holder of the electronic money instrument. In addition, logistical difficulties could possibly be overcome by allowing for redemption via bank deposits.)

4. The EMI Council also acknowledges the fact that national definitions of "credit institution" differ across Member States and that in some countries issuers of electronic money currently exist which do not fulfil the respective national definition of a credit institution.

5. As noted above, an exception was already foreseen in the EMI's 1994 report on prepaid cards. The exception was a permanent grandfathering clause for schemes which had already been established at that point in time. It would be necessary to examine whether such a permanent grandfathering clause could be maintained in a revised version of the First Banking Co-ordination Directive for such schemes, e.g. if their nature would make the application of the ensuing banking legislation less sensible.

HTML Editor's note: Taken from the 1997 Annual report of the EMI, located at http://www.ecb.int/emi/pub/pdf/ar97/en_ar97.pdf

This version, and the related 1994 report, located at http://www.systemics.com/docs/papers/