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E-Money and virtual currencies

Updates

12 Sep 2016

The US House of Representatives has passed a non-binding resolution calling for a national technology innovation policy that includes supportive language for digital currencies and blockchain technology.This resolution was first introduced in July, prompting the US government to craft a national policy for technology. It has specific mentions for digital currencies and blockchain. The bill, written by Illinois Representative Adam Kinzinger, passed by a voice vote from backers on 12 September. The House Resolution 835 even non-binding is a step forward the recognition of blockchain technology as a future fin-tech development.

9 Sep 2016

Internet technologies become continuously more advanced, and so do the ways in which criminals utilise them for their illicit and illegal activities. Among these technologies, digital currencies are already transforming the criminal underworld. There is a clear consensus that digital currencies pose a money laundering and terrorism financing threat. Europol, INTERPOL, and the Basel Institute on Governance recognise that Law Enforcement Agencies worldwide could benefit from the exchange of information and knowledge with peers from other jurisdictions. Therefore Europol, INTERPOL, and the Basel Institute on Governance established the tripartite partnership on money laundering with digital currencies.

The working group will aim to:

• Gather, analyse, and exchange non-operational information regarding the use of digital currencies as a means of money laundering, and the investigation and recovery of proceeds of crime stored in the same form;
• Organise annual workshops and meetings for the representatives of the above mentioned Law Enforcement Agencies and institutions to increase the capacity to successfully investigate crimes in which virtual currencies are involved;
• Create a network of practitioners and experts in this field, who can collectively establish best practices and provide assistance and recommendations inside and outside the working group.

 

28 Aug 2016

Although blockchain technology is mainly associated with the e-commerce and e-money and virtual currencies sectors, online cryptocurrency journal The Merkel has identified a trend that is bringing blockchain closer to digital identities. The journal reports that a number of blockchain startups are focusing on using the technology to create digital identities, and are seeing a promising growth in this segment of the market.

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The digital currencies story is a continuation of the long-running saga of economics, markets, and commodity exchange in human society. With the constant rise of the global network, we have witnessed many global services becoming widely accepted and in a way changing (by adding to) our experience of mutual interaction. Looking back in history of the Internet we can conclude that public-key cryptography and digital signatures make e-money possible.

 

E-money can either be centralised (with the control point of money supply) or decentralised, where the control over the supply can come from various sources or network of sources (Bitcoin and/or other virtual currencies). The main difference between e-money and virtual currencies is that e-money does not change the value of the fiat currency (euro, dollar, etc), but virtual currency is not equivalent to any fiat currency. In other words, all digital currency is electronic money, but e-money is not necessarily digital currency.

E-money

Electronic money or e-money in short is the money balance recorded electronically on a stored-value card or remotely on a server. The Bank for International Settlements defines e-money as ‘stored value or prepaid payment mechanisms for executing payments via point-of-sale terminals, direct transfers between two devices, or even open computer networks such as the Internet’. E-money is usually associated with so-called smart cards issued by companies such as Mondex and Visa Cash.

Electronic money is a floating claim that is not linked to any particular account. Examples of e-money are bank deposits, electronic fund transfer, payment processors, and digital currencies.

The term ‘stored-value card’ means the funds and/or data are 'physically' stored on the card, in the form of binary-coded data. With prepaid cards, the data is maintained on the card issuer's computers. Typical stored-value cards include: prepaid calling cards, gift cards, payroll card, loyalty cards, travel cards.

E-money can also be stored on (and used via) mobile phones or in a payment account on the Internet. Most common and widely used mobile subsystems are Google Wallet and Apple pay.

The fast introduction of e-money has lead to governmental regulatory activities. Hong Kong was among the first jurisdiction to regulate e-money, by allowing only licensed banks to issue stored-value cards. Since 2001, the European Union has implemented a directive on the taking up, pursuit and prudential supervision of the business of electronic money institutions (E-Money Directive - 2009/110/EC).

Electronic currencies can be divided into soft currency and hard currency. Hard electronic currency is one that only supports non-reversible transaction. Reversing transaction, even in case of a legitimate error is not possible. They are more oriented to cash transactions. Examples for hard currencies are: Western Union, KlickEx, or Bitcoin. On the other hand, soft electronic currency is one that allows reversal of payments in a case of fraud or disputes. Examples are PayPal and credit cards.

Digital currency

Simple intention drives this technological avalanche, based on financial and commercial competition (as is the case of regulated economies). In this struggle, the regulated market and the privacy of the affairs of financial actors are crucial. Fair and constructive financial institutions acting as intermediaries are the safeguards of these principles.  In most cases these are state regulatory agencies. But something has changed in the digital era. Regulation is taking a new form of teamwork and networking.

The European Central Bank defined in 2012 virtual money (virtual currencies) as a ‘type of unregulated, digital money which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community’. This Internet based medium of exchange have properties similar to physical currencies, however allows for instantaneous transaction and borderless transfer-of-ownership. Banks and customers use their keys to encrypt (for security) and sign (for identification) blocks of digital data that represent money orders. A bank ‘signs’ money orders using its private key and customers and merchants verify the signed money orders using the bank’s widely published public key. Customers sign deposits and withdraw using their private key and the bank uses the customer's public key to verify the signed withdraws and deposits.

In 2014, the European Banking Authority defined virtual currency as ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically’.

Both virtual currencies and cryptocurencies are types of digital currencies.

Cryptocurrencies are set to take the online world by storm, as their popularity and use, and understanding of their advantages and limitations increases. Giant companies like Apple, Dell and PayPal have already indicated their plans to integrate cryptocurrencies as a payment method, and more are likely to follow, with Bitcoin emerging as one of the most popular virtual electronic currencies. The main invention of this cryptocurrency is to present the central ledger of all transactions, known as block-chain. This open source software allows all peers in a network to verify every transaction ever made in the Bitcoin system and therefore serve as guardians to this central ledger.

There are signs that central banks are also paying more and more attention to virtual currencies. As an example, in early 2016, the People's’ Bank of China announced that it was looking into the possibility of launching its own virtual currency, considering that this would contribute to making economic activities more transparent, while also reducing money laundering and tax evasion.

The main issues

There are many comparative advantages of this system of money creation and payments compared to the usual form of online financial transactions. Using one source (the Internet) to connect to a unique global financial system sounds like possible futuristic idea, but with virtual currencies, it is not far away.

At the same time, there are also many warnings that virtual currencies could be misused for illegal goods and services, fraud, and money laundering. The anonymity associated to the use of virtual currencies (such as Bitcoin) transactions increases the potential of possible misuse. A US government-funded report on the 'National Security Implications of Virtual Currencies', published at the end of 2015, noted that ‘non-state actors’, including terrorist and insurgent groups, may exploit virtual currency by using it for regular economic transactions.

Government regulation is still the key to virtual currencies attracting more users, as well as to potentially address the risks of misuse. States around the world are currently considering its regulation. This will not only increase consumer confidence in the technology, it will also involve more companies and investors in the growing business. While some are arguing that unregulated virtual currencies are safe haven for money laundering and illegal flow of money, others present this as an ultimate tool in fighting identity thefts and leakage of personal financial information.

Events

Instruments

Other Instruments

EBA Opinion on Virtual Currencies (2014)

Resources

Articles

Bitcoin’s Creator Satoshi Nakamoto Is Probably This Unknown Australian Genius (2015)
Taxation and Today's Digital Economy (2015)
This is Why Bitcoin Won’t Go Away Anytime Soon (2015)
Tech Giant Microsoft Accepts Bitcoin Payments (2014)
Online Cash Bitcoin Could Challenge Governments, Banks (2011)

Publications

Opportunities and Risks Associated with the Advent of Digital Currency in the Caribbean (2016)
Internet Governance Acronym Glossary (2015)
An Introduction to Internet Governance (2014)

Papers

Bitcoin: A Peer-to-Peer Electronic Cash System (2008)

Reports

One Internet (2016)
Virtual Currencies and Beyond: Initial Considerations (2016)
National Security Implications of Virtual Currency. Examining the Potential for Non-state Actor Deployment (2015)
EBA Opinion on Virtual Currencies (2014)
Risk Management for Electronic Banking and Electronic Money Activities (1998)

GIP event reports

Report for World Economic Forum Annual Meeting 2017 (2017)

Other resources

Revenue and Customs Brief 9 (2014): Bitcoin and Other Cryptocurrencies (2014)
Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (2013)

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