## Making Electronic Money Safer in the Digital Age

_IMF Blog, December 14, 2021_

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## Bibliographic details
- Authors: Jose Garrido, Jan Nolte
- Published: December 14, 2021

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### Overview
- 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.

### Nature and use of e-money
- 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.

### Risks and regulatory gaps
- 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.

### Policy recommendations and safeguards
- 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.

### Context and urgency
- 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*

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## References

- [IMF staff paper](https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2021/12/13/E-Money-Prudential-Supervision-Oversight-and-User-Protection-464868)
- [https://www.imf.org/wp-content/uploads/2021/12/e-money-2.png](https://www.imf.org/wp-content/uploads/2021/12/e-money-2.png)
- [Global Crypto Regulation Should be Comprehensive, Consistent, and Coordinated](https://blogs.imf.org/2021/12/09/global-crypto-regulation-should-be-comprehensive-consistent-and-coordinated/)
- [Public and Private Money Can Coexist in the Digital Age](https://blogs.imf.org/2021/02/18/public-and-private-money-can-coexist-in-the-digital-age/)
- [Legally Speaking, is Digital Money Really Money?](https://blogs.imf.org/2021/01/14/legally-speaking-is-digital-money-really-money/)
- [You’ve Got Money: Mobile Payments Help People During the Pandemic](https://blogs.imf.org/2020/06/22/youve-got-money-mobile-payments-help-people-during-the-pandemic/)

_Source: https://www.imf.org/en/blogs/articles/2021/12/14/blog121421-making-electronic-money-safer-in-the-digital-age_