New EU emoney directive

[Pelle Braendgaard]

Have any of our European members had a look yet at the new emoney directive?

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:267:0007:0017:EN:PDF

The original one was terrible. At least the capital requirements have
dropped from 1 million Euro to 125K. But still that leaves non venture
funded startups out of the innovation game.

OutLaw writes at: http://www.out-law.com/page-10470

The E-Money Directive has failed to help establish a market for
virtual currency and will be replaced with a set of less onerous
regulations. The replacement E-Money Directive will come into force at
the end of this month.

The European Council and European Parliament published the replacement
Directive in the Official Journal of the European Union on 10th
October. It will come into force 20 days after publication and must be
transposed into national law by the EU's 27 member states by the end
of April 2011.

The Council said that it hoped that the new Directive would address
the failures of the old one.

"Its adoption follows an assessment by the Commission of [the old
Directive] which shows that electronic money is still far from
delivering the benefits that were expected when that directive was
adopted eight years ago," said the Council when it announced the new
law earlier this year. "The number of newcomers to the market has been
relatively low, and in most member states e-money is not yet
considered a credible alternative to cash."

Jacob Ghanty, an expert in finance law at Pinsent Masons, the law firm
behind OUT-LAW.COM, said that the new version of the Directive lowers
some of the barriers preventing companies from offering e-money
services.

"There was some criticism of the prudential regime of the Directive,
which means the amount of money you have to hold to offer services,"
he said. "People who looked at it realised that to be an issuer you
were required to hold a lot of capital, which was quite onerous."

"That will now dropped from €1 million to €125,000, which is a big
dip," said Ghanty.

He said that it will align the requirements relating to e-money to the
requirements that payment institutions will have to meet under the
Payment Services Directive, which comes into force on 1st November.
"It will align it with the Payment Services Directive requirements,
which is sensible because they are related concepts."

Ghanty said that the new E-money Directive also clears up some
confusion about what e-money actually is. "There were criticisms that
under the old Directive the definition of what e-money is was broad
and vague, and that that made it difficult to determine what was and
was not e-money," he said.

"The new one actually simplifies the definition which makes it clearer
and also makes it more capable of coping with technology advances in
the future," he said.

The old definition of e-money employed by the EU law actually excluded
many kinds of services that service providers might have thought did
count as e-money.

"Quite often a client would ask 'does it amount to e-money under the
Directive' and we were able to conclude more often than not that it
didn't amount to e-money, and this was not the intention of the
Directive," said Ghanty. "I think the new definition will clearly
capture the things the Directive was intended to catch."



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[Pelle Braendgaard]

I finally had time to read the directive. These things are always such
fun to read. but there is a discrepency between what outlaw writes and
what it actually says in the directive.

Outlaw claim the capital requirements for emoney services was lowered
to 125k euros. But Article 4 says:

"Member States shall require electronic money institutions to hold, at
the time of authorisation, initial capital comprised of the items set
out in Article 57(a) and (b) of Directive 2006/48/EC, of not less than
EUR 350 000."

If this is truly the case then it's even worse that originally
thought. That would probably even leave seed funded startups out of
the game.

Ridiculous.

Anyone else studied this?

P

[David Nicol]

so how tricky is it set up an electronic money institution in a non-EU
jurisdiction, for instance Nevada?

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[Pelle Braendgaard]

The wiki has a few links to US rules:
http://wiki.github.com/opentransact/opentransact/regulation

The federal government have some rules governing reporting. It is a
bit hard to decipher what would be the equivalent of an electronic
money institution. I would have placed e-gold for example in the
stored value business as that is what they did, but they were charged
with operating an illegal money transmitting business.

As a community we could probably send them a request for an opinion
for more details. Here is their main page:

http://www.fincen.gov/financial_institutions/msb/

From my little research every state has different rules though. My
state of Florida would probably want to license it as a money
transmitter, which has a min $50k bond or deposit requirement.

Generally though it seems like you can get around regulation both in
the US and in Europe if accounts and transactions are small (sub
$1000). For experimenting I would enforce even stronger limits, say
$200 to be safe.

If you find out some more, please update the wiki.

Thanks
Pelle

[Pelle Braendgaard]

This is my personal analysis of the EU rules, which should not be
taken as legal advice as I am but a lone computer nerd and not a
lawyer.

I have added this to the wiki at:
http://wiki.github.com/opentransact/opentransact/eu-rules

Please help and make changes to this based on any research you are doing.

What is electronic money?
The EU defines it as follows:

“electronic money” means electronically, including magnetically,
stored monetary value as represented by a claim on the issuer which is
issued on receipt of funds for the purpose of making payment
transactions as defined in point 5 of Article 4 of Directive
2007/64/EC, and which is accepted by a natural or legal person other
than the electronic money issuer; (Article 2 of Directive 2009/110/EC
)

The payment transaction mentioned is:

‘payment transaction’ means an act, initiated by the payer or by the
payee, of placing, transferring or withdrawing funds, irrespective of
any underlying obligations between the payer and the payee; (point 5
of Article 4 of Directive 2007/64/EC )

I read this as any kind of system designed for payment that maintains
a balance. As it doesn’t specify how it is stored I read this to
include both bearer and book entry based stored value systems. The
main purpose of the value stored should be for payments and not for
investing/saving etc.

Major exclusions
Article 1

This Directive does not apply to monetary value stored on instruments
exempted as specified in Article 3(k) of Directive 2007/64/EC.
(Article 1(4) of Directive 2009/110/EC)

which says:

(k) services based on instruments that can be used to acquire goods or
services only in the premises used by the issuer or under a commercial
agreement with the issuer either within a limited network of service
providers or for a limited range of goods or services; (Article 3(k)
of Directive 2007/64/EC )

So basically in store currencies. As far as I can see this means you
are not part of these rules if you as the issuer of the currency are
also the main company accepting the currency. So I take this to mean
that virtual game currencies or stored service credits are excluded.

Article 1

This Directive does not apply to monetary value that is used to make
payment transactions exempted as specified in Article 3(l) of
Directive 2007/64/EC. (Article 1(5) of Directive 2009/110/EC)

which says:

(l) payment transactions executed by means of any telecom- munication,
digital or IT device, where the goods or services purchased are
delivered to and are to be used through a telecommunication, digital
or IT device, provided that the telecommunication, digital or IT
operator does not act only as an intermediary between the payment
service user and the supplier of the goods and services; (Article 3(l)
of Directive 2007/64/EC )

This to me is extremely confusing, it is an extremely broad out clause
most likely lobbied into it by the mobile phone operators. I take this
to mean any kind of payment service where this is not the main service
of the payment service. So for example a mobile operator could offer
payments as it’s main connection with the user is providing phone
services. This clause is interesting, but someone should definitely
consult with a lawyer on it.

Finally while not mentioned specifically in the emoney directive.
There are a full list of other exclusions listed in Article 3 Negative
Scope of Directive 2007/64/EC that should be read. Specifically for
those of us interested in being technical service providers we are
excluded just like in the US:

(j) services provided by technical service providers, which support
the provision of payment services, without them entering at any time
into possession of the funds to be transferred, including processing
and storage of data, trust and privacy protection services, data and
entity authentica- tion, information technology (IT) and communication
network provision, provision and maintenance of terminals and devices
used for payment services; (point j of Article 3 of Directive
2007/64/EC )

Capital Requirements
The initial capital requirements are probably the most important
information needed for startups in the electronic money space. This is
also the most conflicting part of the rules. Hopefully we can figure
out what they actually mean.

The actual E money Directive 2009/110/EC says the following in Article 4:

Member States shall require electronic money institutions to hold, at

the time of authorisation, initial capital, comprised of the items set

out in Article 57(a) and (b) of Directive 2006/48/EC, of not less than
EUR 350000.

What Article 57(a) and (b) say is that this has to be in either fully
paid up share capital adjusted by profit or loss. So basically the
cash your startup has available.

Now I have heard the amount of EUR 125,000 mentioned as being the
minimum capital requirement for e-money issuers. This number seems to
come from Article 6© of Directive 2007/64/EC

© where the payment institution provides any of the payment services
listed in points 1 to 5 of the Annex, its capital shall at no time be
less than EUR 125 000.

These points in the annex are as follows:

Services enabling cash to be placed on a payment account as well as
all the operations required for operating a payment account.
Services enabling cash withdrawals from a payment account as well as
all the operations required for operating a payment account.
Execution of payment transactions, including transfers of funds on a
payment account with the user’s payment service provider or with
another payment service provider:
execution of direct debits, including one-off direct debits,
execution of payment transactions through a payment card or a similar device,
execution of credit transfers, including standing orders.
Execution of payment transactions where the funds are covered by a
credit line for a payment service user:
execution of direct debits, including one-off direct debits,
execution of payment transactions through a payment card or a similar device,
execution of credit transfers, including standing orders.
Issuing and/or acquiring of payment instruments.
However if you are a money transmitter you only need EUR 20,000:

(a) where the payment institution provides only the payment service
listed in point 6 of the Annex, its capital shall at no time be less
than EUR 20 000;

From Annex:

6. Money remittance

So what is Money remittance? “Article 4(13)” defines money remittance as:

‘money remittance’ means a payment service where funds are received
from a payer, without any payment accounts being created in the name
of the payer or the payee, for the sole purpose of transferring a
corresponding amount to a payee or to another payment service provider
acting on behalf of the payee, and/or where such funds are received on
behalf of and made available to the payee;

So basically a Western Union like system. However it does say a system
without payment accounts, so in theory (but probably not in practice)
it could be read as including with bearer currencies that don’t
operate on the concept of accounts.

Finally Article 6© lists:

(b) where the payment institution provides the payment service listed
in point 7 of the Annex, its capital shall at no time be less than EUR
50 000;

From Annex:

7. Execution of payment transactions where the consent of the payer to
execute a payment transaction is given by means of any
telecommunication, digital or IT device and the payment is made to the
telecommunication, IT system or network operator, acting only as an
intermediary between the payment service user and the supplier of the
goods and services.

Again this is ridiculously broad and could be read to include any
mobile device based system. It is interesting though as EUR 50,000 is
considerably less than EUR 350,000 or EUR 125,000 and could
conceivably be managed by a startup through a small seed round.

What does this mean? Please add your own comments.

[Robert O'Brien]

Pelle,

Thanks for this. Getting my head around the EU directives for EMoney
and Payment Services are a task waiting to be done, so your info gives
me a head start.

Have you also looked at the Payment Services Directive? I suspect the
EUR125K capital requirement you mentioned is also defined there.
Quickly scanning the PSD is seems to define a Payment Institution and
associated capital requirements.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:319:0001:01:EN:HTML

BTW, I'm not to sure how these two directives relate to each other.

Robert.

2009/12/8 Pelle Braendgaard <pe...@stakeventures.com>:

[hughbarnard]

Hi Pelle, Robert

Thanks to both of you...in some ways, I'm heartened by these
directives, because they bring the whole area into official,
undeniable, existence, though (of course, vested interests being what
they are) the entry barriers are set high. Of course, directives must
be transposed into national law, and perhaps disfigured on the way.

I wonder, for example, whether enough governance could be injected
into some kind of 'people's money mutual'? I'm mainly on the non-
profit social enterprise side but such a thing could also be run for
profit without losing too much 'member input' and creating another
exploitative institution.

Best regards Hugh

[David Nicol]

On Tue, Dec 8, 2009 at 10:02 AM, hughbarnard
<hugh.b...@googlemail.com> wrote:
> I wonder, for example, whether enough governance could be injected
> into some kind of 'people's money mutual'

that makes sense. Meet the size requirements by organizing a collective.

[Anthony Schexnaildre]

While I pay the bills by building commercial payment and banking systems I have a keen interest in non-profit social enterprises such as community currencies. However I am not very confident in the success of a collective type structure. I think it would be more beneficial to the long term success of the venture to find a way to raise the necessary capital in order to have enough control to swiftly make necessary critical decisions. Otherwise you run the risk of things dissolving into the mediocrity of design by committee. I'm not saying that's a universally weak structure but rather creating a successful independent payment system is just really hard.

-Anthony