E-money Rides Again, at the Least appropriate Time Possible

This report from El Reg on the Commission's new Working Document on e-payments is so gloriously cynical that I'm not even going to try to re-write it.

"The European Commission has launched a new legal framework to boost the use of "electronic money" within the EU, even as we all realise we had even less real money than we thought.

The Eurocrats have admitted that earlier utopian predictions that we’d all be loading cash on our mobile phones, travel cards or internet accounts have proved to be somewhat overblown. In part, it is blaming itself, saying current rules “have hindered the takeup of the electronic money market, hampering technological innovation”.

Translated, this means the foolish peasants (the rest of us) have refused to stop keeping anachronistic wads of notes and piles of coins in stupid places like pockets, in wallets, under mattresses, that sort of thing, when what they really should be doing is paying smart young things to take their money and convert it into cyber cash, loaded on trustworthy items like phones, Oyster cards, servers and deelie boppers.

So, in the interests of keeping the dream alive, Brussels has proposed a new framework for “issuing electronic money”. This will include a “technologically neutral and simpler definition”, ie that electronic money is “monetary value stored electronically on receipt of funds and which is used for making payment transactions". This will include e-cash stored on devices in the holders' possession or “remotely at a server.” "

Internal capital requirements for EMIs will be reduced to 125,000 Euros - "“enabling market entrance for smaller players" - is this really what we want to encourage at a time when giants like HBOS etc are dropping like flies?! What happens when an EMI goes under? Does the relevant national underwriting guarantee apply? We have all the potential problems of Icesave staring us in the face as a stark example that national guarantees do not transpose well to virtual banks.

As all IT lawyers know, the main problem with the old EMI Directive was indeed that it was not technology-neutral at all, but modelled around smart card money, which was terribly hip before all the schemes like Mondex etc quietly flopped and failed. When in reality it turned out that what people wanted was credit, not debit, in times of free fast credit thrown at you from all directions, and/or alternately to use anonymous, data-protecting, handy account-based systems like Paypal (complete with useful guarantee for eBay transactions) rather than carry round yet another card whose loss might result in loss of actual money, without guarantee of repayment.

It sounds like Brussels has now finally recast the definition of an EMI to firmly cover the likes of Paypal. (See the now defunct argument about this via Andres Guadamuz here.) Which is sort of amusing when PayPal itself long gave up on the clunky EMI framework and instead just became a bank in Luxembourg. And when the bottom has dropped out the credit market so thoroughly that pre-pay debit cards might just possibly become saleable again.. (though I wouldn't hold my breath. The Oyster card/debit car all-in-one model however should be useful whenever they iron out the commercial holdups.)

What will be really interesting to see is how far the proposed new rules cover mobile- phone-as-e-wallet - which is the development that was already looking set to revitalise the digital payments sector, if anything could.

Also the problem remains that paying by Paypal , even when linked to a credit card, is not covered by the usual guarantees of the EC consumer credit legislation - or at least not according to the UK Banking Ombudsman and the FSA - and should thus really be discouraged for dubious or large purchases (eg travel companies about to go bust, unknown ebay sellers).

I doubt the consultation touches this , being mainly concerned with capital requirements and the like, but I'll report back when i've actually read it properly , ok?

EDIT: OK, an hour later..

The consultation does indeed refer to MNOs (MObile Network Operators)) as another problem for the definition of e-money, along with "server-based" systems like Paypal.

It is starkly admitted that traditional smart card systems a la Mondex are dead. Contactless transport cards as e-money are catching on yes (22 in the Czech Republic), but still almost exclusively used at unmanned sites such as transport turnstiles or car parks. Public shows no sign of wanting to use e-cash more extensively. (This may explain the mysterious failure of the Oyster system to expand to small value real world purchases eg newspapers..)

The only major problem asserted with the current ElMI system apart from the definition issues is the high internal capital requirement - hence the suggestion to reduce from 1 m Euros to an eighth of that!

There is no mention of the difficulties with credit card like guarantees for paypal etc payments, unless it is dealt with tangentially in the under discussion harmonisation of EU payment laws under the Payments Directive, currently due to be passed November 2009.

Similarly money laundering - which is known to be increasingly used by criminals to get funds past national borders, especially to Africa and Eastern Europe - is left to be dealt with as and when by financial fraud legislation.

Overall, a remarkably unambitious and pretty redundant consultation. One suspects it might habve been more sensible if politically difficult to shelf this document entirely untiul the dust settles a bit on the current financial meltdown.

Second Life bans virtual banks..

.. reports the Register.

That's only banks practicing only in virtuality - LInden dollar lenders and investors - according to El Reg - "meatspace" licensed banks are allowed to continue to operate. The reason given is that virtual banks were proving unstable due to offering riunous rates of return on invested Linden dollars.

"Since the collapse of Ginko Financial in August 2007, Linden Lab has received complaints about several in-world 'banks' defaulting on their promises. These banks often promise unusually high rates of L$ return, reaching 20, 40, or even 60 percent annualized," wrote Ken D., yesterday.

"Linden Lab isn’t, and can’t start acting as, a banking regulator," he added.

Which is interesting given a question that floated my way over the holidays: are virtual worlds , like Linden Labs, which issue widely used in-game currencies, convertible to and purchasable with real-world currencies, issuers of "electronic money"? And if hould they be regulated as deposit-taking baks are - or alternately do they fall within specialised regulatory schemes like the well-known if under-used EC Electronic Money Issuer Directive?

The EMI Directive was originally clearly intended to regulate "digital cash" issued on stored-value smart cards, as with the MOndex scheme rolled out in the early 2000s. Such schemes have never really caught on (though are arising again in the form of transport stored value cards like Oyster) - but the EMI has since been used to regulate quite different paradigms of electronic money such as the Pay pal business.

One point, as the Register notes, is that Linden Labs themselves clearly do not intend to hold themselves out as an EMI (or in the US perhaps, simply a bank). Their own terms and conditions say:

""Linden Dollars are not money, they are neither funds nor credit for funds. Linden Dollars represent a limited license right to use a feature of the simulated environment. Linden Lab does not offer any right of redemption for any sum of money, or any other guarantee of monetary value, for Linden Dollars."

On the other hand it is a notable feature of both ordinary money and EMIDir "electronic money" that it can be redeemed for face value against the issuer at any time, and this is right ("claim" according to the EMI Dir). For more erasons why 2L is probably not an EMI, see the useful chapter by Guadamuz and Usher in (ahem) Edwards ed The New Legal Framework for e-commerce in Europe.

Pangloss wonders what each virtual bank's T & C say about redemption in the event of the bank being closed down involuntarily by the platform host virtual world. The point of both banking and EMI regulation is at least partially to ensure that in the event of bank failure or closure, capital reserves must be maintained such that users at least get their stakes back. If that matter is left purely to contract however, it might be quite legal for Virtual Bank of Third Life (say) to provide that in the event of closure by platform world, all reserves are void. Or it might simply have run out of money - a run on the banks will no doubt by now already have started - as El Reg add "Linden Labs has requested that the virtual banks settle up with investors by January 22, honoring withdrawals. That should be interesting." Indeed.

If banks do not pay up and Second Life will not intervene to protect their users, relying on their stance that they are neither a money issuer nor a bank regulator - Would real space governments be prepared to get involved ? Eat your heart out, Northern Rock:)

The Oyster is hard to Prise Open..

Re yesterday's query about when Oyster Card would finally roll out as a multi purpoe contactless small payments card.. look no further.

Interestingly, no mention of legal difficulties round becoming an EMI - only commercial problems with revenue sharing.