Making Electronic Money Safer in the Digital Age

IMF Blog, December 14, 2021

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Authors: José Garrido, Jan Nolte
Publication date: December 14, 2021
Core message: As e-money use grows, regulators need to focus on consumer protection and the integrity of the overall payments system.
Motivation: Growing reliance on e-money for everyday payments and government functions (benefit transfers, tax collection) creates potential systemic risks and consumer-protection challenges.

Definition: E-money is a digital representation of fiat currency guaranteed by its issuer; customers exchange regular money into e-money to make immediate payments via apps, prepaid cards, or electronic devices.
Characteristics:
- E-money represents an enforceable claim against the e-money issuer; customers can demand repayment of funds used to purchase e-money.
- E-money operates in a regulated framework, unlike most privately issued stablecoins.
Financial inclusion role:
- E-money is a vital part of daily life for billions of people, especially in many developing countries where many lack access to the banking system.
- Example region: East African countries—"two-thirds of the combined adult population of Kenya (where M-PESA has reached a high degree of market penetration), Rwanda, Tanzania, and Uganda use e‑money regularly."
- Many users do not have bank accounts and store significant shares of disposable funds in e‑money wallets accessed by mobile phones or computers.

Operational failures: Examples include stored-value cards returning errors or wallets becoming inaccessible due to provider bankruptcy.
Dependence risks: In rural areas, e-money may provide the only access to the financial system; failure could cut off access.
Systemic concerns:
- A potentially systemic e-money issuer’s failure could disrupt day-to-day transactions and critical payment services at large scale.
- Segregation/safekeeping alone may not ensure quick customer access to funds absent specific bankruptcy rules; discontinuity could create severe problems.
Supervision challenges: Regulators and supervisors may struggle to keep pace with evolving business models and need to consider consumer protection and level playing field issues.

Prudential regulation and governance:
- E-money issuers should be subject to proportionate prudential regulatory requirements.
- Issuers should establish operational risk governance and management systems to identify and limit risks.
- Issuers should be prohibited from retail lending.
Consumer protection measures:
- Rules governing disclosure of fees, protection of consumer data, and handling of complaints should be applied to e-money issuers to protect potentially less sophisticated consumers.
Safekeeping and segregation:
- All e-money issuers need mechanisms to safekeep and segregate customer funds.
- Issuers need to maintain a secure pool of liquid funds equivalent to the amounts of customers’ balances, kept separate from the issuer’s own funds.
- Purpose: Fundamental safeguard against misuse and, in principle, allow recovery of funds in issuer bankruptcy.
Continuity and systemic protections:
- In countries with a potentially systemic e-money issuer or sector, protections should seek to preserve customers’ funds and ensure continuity of critical payment services.
- Services should be restorable or replaceable quickly, preferably within hours.
Deposit insurance:
- Some countries have sought to extend deposit insurance to e-money, but operationalizing such protection remains largely untested in practice.
- The costs and benefits of effectively extending deposit insurance coverage to e-money should be carefully considered.

Evolution of digital money: Central bank digital currencies, privately issued stablecoins, and e-money continue to evolve and become more integral in daily life.
Policy environment: Best practices are still taking shape in the fintech sphere, making decisions challenging.
Pandemic effect: The pandemic accelerated online transactions and e-money’s growth, increasing the importance of prudent e-money frameworks.
Call to action: For regulators and supervisors, the time for action is now.

IMF Blog: Making Electronic Money Safer in the Digital Age — José Garrido, Jan Nolte; December 14, 2021