Group of Ten - Electronic Money - Consumer protection, law enforcement, supervisory and cross border issues

September 1997

Summary and conclusions

In June 1996, the G-7 Heads of State called for a cooperative study to investigate the implications of recent technological advances that make possible the creation of sophisticated methods for making retail electronic payments. Consistent with this objective, the Working Party was asked to produce a report that developed a broader understanding of the policy issues facing governments as a result of electronic money and to identify any issues that could benefit from additional international cooperation. Building on the extensive body of previous analysis and work on this subject, the Working Party concentrated on three broad policy areas: consumer issues, law enforcement issues, and supervisory issues. The Working Party also met with a broad cross-section of firms and organisations associated with electronic money in many of the G-10 countries.

The various electronic money products are still at a relatively early stage in their development. Providers of products in various pilot projects and early nation-wide implementations indicate that the potential exists for stored-value cards and their network equivalents to provide important efficiency benefits by reducing cash handling costs and improving speed and convenience for consumers in making small-value payments. It is still, unclear, however, how quickly these products will spread in the G-10 countries.

On consumer issues, overall, the Working Party's review of current consumer protection stances within the G-10 yielded two main observations: 1) most countries are relying on existing laws and regulations in addressing risks such as loss, fraud, insolvency, and privacy concerns rather than enacting comprehensive new measures specifically aimed at electronic money; and 2) government policies on consumer protection and electronic money are still evolving as this technology continues to develop.

Regarding law enforcement issues, emerging electronic money systems are currently focused on low-value consumer transactions, which may present less of a concern to law enforcement authorities. It is too early to determine whether or not over the longer term these products will evolve in such a way as to become more or less attractive for money laundering, tax evasion, and other financial crimes or more vulnerable to fraud and counterfeiting. To date, G-10 countries have generally not seen the need to develop new anti-crime laws specifically directed at electronic money. Continued monitoring, as well as dialogue and cooperation with developers of electronic money, will be required.

On supervisory issues, the Working Party noted that G-10 countries had adopted a wide variety of responses to the supervision and regulation of electronic money products. To the extent traditional banks and other regulated financial institutions are playing the key roles in the issuance of electronic money, existing supervisory and regulatory approaches are being adapted as appropriate. In order to accommodate non-traditional issuers, some countries are considering a more specialised supervisory framework specifically for electronic money issuers. Some view the market as providing strong incentives for electronic money issuers to protect themselves against operational and financial risks. Market incentives are seen as being useful in encouraging providers to address consumer protection and law enforcement issues as well.

The Working Party┬┐s discussions of consumer, law enforcement, and supervisory issues suggested several key considerations to which consumers, providers, and authorities may wish to give attention in the implementation and use of electronic money products as well as in the development of national policies. The formulation of these considerations is meant to highlight potentially important aspects without implying any particular policy approach.

Key considerations:

Transparency: Potential users can best make informed choices about the relative merits of electronic money products if their features, costs, and risks are sufficiently transparent. Useful disclosures for consumers could include information about significant user rights, relevant information on the issuer and its obligations towards consumers, applicability of any deposit insurance or other guarantees, and intentions regarding any use of personal data.

Financial integrity: The financial integrity of any electronic money issuer rests importantly on adequate liquidity, capital, and internal controls. Liquidity should be adequate to ensure that issuers can meet demands for funds; investment policies should be appropriate to ensure the solvency of the electronic money scheme; management should establish risk management policies and procedures and internal controls consistent with protecting the financial integrity of the scheme.

Technical security: Technical security measures have important implications for the financial and operational reliability of an electronic money scheme. These measures should be assessed comprehensively with the aim of protecting against fraud or counterfeiting attacks that could threaten the overall integrity of the electronic money scheme.

Vulnerability to criminal activity: The design of electronic money schemes can affect importantly the risks of criminal usage of and attacks on electronic money. As a result, realistic evaluation should be conducted of the vulnerabilities of particular products to these risks.

On cross-border issues, given the early stage of commercial development, the Working Party saw virtue in adopting a flexible response to electronic money issues. The Working Party recognised that innovation and competition in the payment system can provide important efficiency and consumer benefits. For example, some electronic money schemes may facilitate cross-border retail payments. Given that a range of national policy approaches have emerged across G-10 countries, authorities may need to consider how best to design, develop and apply national policies so as to minimise any impediments to the cross-border use of, or competition in the provision of, electronic money.

Efforts in this area of such groups as the CPSS, the BIS, the Basle Committee on Banking Supervision, the FATF, the OECD, the EC, and the EMI are likely to be beneficial. In the Working Party's view, while additional discussions may become appropriate in certain areas, it is not necessary at this time to establish new formal international coordinating mechanisms specifically addressing electronic money developments. The Working Party has provided a useful forum for bringing together the perspectives of central banks, finance ministries and law enforcement authorities and has promoted constructive international dialogue on potential policy implications. As more experience with electronic money is gained, governments may wish to take a similar approach to reviewing electronic money developments in the future if circumstances warrant.