4 E-money
4.1 Scope and key concepts
4.1.1 E-money is a digital alternative to cash. It allows users to make cashless payments with money stored on a card or phone, or over the internet.
4.1.2 It is broadly defined as electronically-stored monetary value, represented by a claim on the issuer, issued on receipt of funds for the purposes of making payment transactions, and accepted as a means of payment by a person other than the issuer.
4.1.3 Payment instruments such as debit cards are not e-money because the monetary value is not stored in the device. These payment instruments only contain the data necessary to identify the holder and link the holder to a bank account. Debit cards also enable the holder to make purchases and/or withdraw cash and have those transactions directly and immediately charged to their bank account, whether held with the card issuer or not. At the other end of the scale, e-money also does not include value stored on instruments that can only be used on the issuer's premises, or a limited network of providers providing a limited range of goods and services.
4.1.4 We propose to regulate e-money within the AFSA's existing Regulated Activities regime, as provided for by section 1.1.1 of GEN. Issuing e-money will therefore become a regulated activity as set out at schedule 1 of GEN.
4.1.5 We also propose that EMIs fall within the existing licensing regime under GEN, but that the Framework include a new registration regime for SEMIs to ensure they are regulated. This allows non-bank Participants issuing e-money, but who do not wish to undertake the full range of banking operations, to be able to operate within the e-money market. Similar to the licensing and registration regime in relation to payment services, this will also allow EMIs and SEMIs to be subject to less stringent prudential requirements than banks, reflecting the limited systemic risk they pose as compared to banks. This reflects the principle set out at 3.1.3(b), and has the dual function of opening up the e-money market to new entrants, whilst also ensuring the integrity of existing Participants.
4.1.6 As a result, entities issuing e-money must only do so in accordance with the General Prohibition. The Framework will introduce an exemption to the General Prohibition for SEMIs. As with payment services, Relevant Authorised Firms will be permitted to issue e-money without needing to be specifically licensed as an EMI or registered as a SEMI. This reflects the fact that they are already adequately regulated under FSFR. However, they will require a license which permits them to carry out the Regulated Activity of issuing e-money. As set out in 3.1.6, it should be noted that the MDB Framework policy paper proposes to develop a standalone regulatory and authorisation framework for digital-only banks. It will be important to ensure that the Framework's provisions as to Relevant Authorised Firms (which could include digital-only banks) are consistent with the MDB Framework.
4.1.7 This licensing and registration regime is supplemented by conduct of business rules. These rules are partly laid down specifically in relation to e-money, but are also provided for under the payment services framework. These conduct of business rules regulate:
- (a)the issue and redemption of e-money, as set out at 4.3 (these are specific to issuers); and
- (b)the payment services aspects of issuers' business, as set out at 3.4. These are the same standards that apply in respect of payment services.
4.1.8 In regulating e-money, specific concerns arise in relation to the trade-off between restricting e-money issuance to authorised institutions, and therefore protecting users, and opening up the e-money market to competition by reducing the barriers to entry where appropriate (e.g. for lower risk entities). We consider that including EMIs in the existing licensing regime but introducing a new registration regime for SEMIs in the Framework strikes a balance between these two concerns. In particular, the registration regime will provide a more proportionate approach for SEMIs which are not subject to the same requirements where their operations fall below a given threshold. For example, in relation to capital requirements, only SEMIs whose business activities generate (or are projected to generate) average outstanding e-money above a certain threshold (€500,000 in the UK) must hold an amount of initial capital at least equal to 2% of their average outstanding e-money.
4.1.9 Supervisory efforts should also consider the pool of money that EMIs and SEMIs will hold pending redemption of e-money, and how the use (i.e. investment) of this pool should be regulated, as well as safeguards against counterfeiting, money laundering, and terrorist financing.
4.2 Licensing and registration regime
4.2.1 Similar to the licensing and registration regime in relation to payment services set out at 3.2, to issue e-money, the Framework will require Participants to be one of the following:
4.2.2 Similar to the concept of a SPI in payment services, a SEMI's business must be projected to generate an average outstanding e-money below a prescribed threshold. In the UK, the total business activities of the applicant immediately before the time of registration as a SEMI must not generate average outstanding e-money that exceeds €5 million. In addition, if the Participant intends to also undertake payment services that are not connected with issuing e-money, its monthly average turnover in relation to these payment services must be less than a prescribed threshold (in the UK, €3 million). The AFSA has confirmed that the equivalent threshold in AIFC will be $5,500,000 USD.
4.2.3 To become a licensed EMI or registered SEMI, a Participant will be required to submit an application to the AFSA and pay a fee. In the UK, these fees range from £250 for re-registration, to £5,000 for a new licence as an EMI. The AFSA has confirmed that the equivalent fees in the AIFC will be $1,000 USD for a SEMI and $3,500 USD for an EMI. As with payment services, the information that must be provided by an applicant Participant will vary depending on whether it is seeking registration or licensing, but may include the information at 3.2.3.
4.2.4 As discussed at 3.2.4, the AFSA may choose to publish guidance or information to assist Participants in making an application for licensing or registration to issue e-money.
4.3 Ongoing requirements
4.3.1 In addition to the registration regime for SEMIs, the Framework will impose requirements on e-money issuers in respect of:
- (a)capital requirements, where:
- (i)EMIs and SEMIs must carry a prescribed amount of initial capital when applying for licensing or registration (see 3.3.1(a)(i)); and
- (ii)EMIs must hold a prescribed amount of ongoing capital, being the greater of the initial capital amount, or 2% of their average outstanding electronic money issued. EMIs will also have to meet the capital requirements in relation to any unrelated payment services aspects of its business;
- (b)safeguarding requirements, where all e-money issuers will need to safeguard funds received in exchange for the e-money they have issued, either by way of segregating funds or an insurance-based solution (for further detail on segregating funds see 3.3.1(b)). Where there is an insolvency event for an EMI, the claims of holders of e-money must also be paid from the asset pool of the EMI in priority to all other creditors;
- (c)allowed activities, where EMIs may – in addition to issuing e-money – carry on activities relating to:
- (i)providing payment services;
- (ii)providing operational and closely related ancillary services, such as executing payment transactions, foreign exchange services;
- (iii)operating payment systems; and
- (iv)business activities other than issuing electronic money;
- (d)reporting and notification requirements, which broadly mirror those set out at 3.3.1(c);
- (e)outsourcing and use of agents requirements, which broadly mirror those set out at 3.3.1(d), however with a distinction between distributing and redeeming e-money, which may be outsourced, and issuing e-money, which may not; and
- (f)accounting and statutory audit requirements, which broadly mirror those set out at 3.3.1(e).
4.3.2 The reason for the Framework containing the ongoing requirements (rather than by amendment to GEN) is because they will apply to certain non-licensed entities such as SEMIs.
4.3.3 The ongoing requirements in the Framework would apply in addition to any requirements in GEN which apply to EMIs. It will be necessary to consider which (if any) of the rules in GEN ought not to apply to EMIs. Where the AFSA wishes for some of the rules in GEN to apply to SEMIs, it will need to make specific provision for this in the Framework or GEN.
4.3.4 As explained at 3.3.2 above in relation to payment services, we note that the MDB Framework policy paper proposes that the standalone DBR apply to digital-only banks. It will be important to ensure that the DBR do not include provisions that conflict with the Framework in the context of e-money. Presumably, a digital-only bank that issues e-money would be subject to the DBR, but they would also be subject to these ongoing requirements and conduct of business obligations in the Framework (set out in this section 4.3 and below at 4.4).
4.3.5 The MDB Framework policy paper also sets out suggestions concerning security standards (e.g. strong customer authentication), client on-boarding, cybersecurity, business recovery, outsourcing, client terms, authorised status and consumer protection. As set out in relation to payment services at 3.3.5, if the MDB Framework were to contain prescriptive measures concerning these areas, it would be necessary to ensure that they do not conflict with any ongoing requirements or conduct of business obligations imposed on e-money issuers.
4.4 Conduct of business rules
4.4.1 The conduct of business rules set out at 3.4 above will apply to e-money issuers in relation to the payment services aspects of their business in the AIFC. In addition, the Framework will set out rules that apply to issuing and redeeming e-money (the e-money rules). The reason for the Framework containing the conduct of business rules (rather than by amendment to COB) is because they will apply to certain non-licensed entities such as SEMIs.
4.4.2 The conduct of business rules under the Framework will be in addition to the rules in COB which will apply to EMIs. It will be necessary to consider which (if any) of the rules in COB ought not to apply to EMIs. Where the AFSA wishes for some of the rules in COB to apply to SEMIs, it will need to make specific provision for this in the Framework or COB.
4.4.3 The e-money rules will apply to issuing and redeeming e-money, where this is carried out by a Participant in the AIFC.
4.4.4 On issuing e-money, issuers must do so at par value (i.e. for the same amount as the funds received) when they receive the funds. They must also do so without delay.
4.4.5 On redeeming e-money:
- (a)holders of e-money must have the right to redeem the monetary value at any time, and at par value;
- (b)the issuer must ensure the contract clearly states the conditions for redemption, including any fees;
- (c)any fees charged for redemption must be proportionate to the costs actually incurred by the issuer (for example, the costs of recording and safeguarding e-money would qualify);
- (d)the issuer cannot award interest in respect of holding e-money, or award any other benefits that are linked to the length of time that the e-money is held; and
- (e)the issuer must allow redemption for up to six years after the contract with the holder of the e-money ends.
4.4.6 In addition to complying with the Framework, the AFSA should consider the extent to which it will require issuers of e-money to comply with other aspects of regulation, such as those outlined in section 3.4.6 in relation to payment service providers. This will primarily be a matter of policy.
[1] If a Participant has average outstanding e-money that does not exceed the prescribed threshold, it does not have to apply to be licensed and it can choose instead to be registered as a SEMI. Registration would be cheaper and simpler than licensing.
[2] Participants must apply to become a licensed EMI if they do not qualify as a SEMI (i.e. their average outstanding e-money exceeds the prescribed threshold).