What is the legal framework for electronic money?
Genesis
Historically, money is divided into two categories:
- Fiduciary money: Physical instruments (coins and banknotes)
- Scriptural money: Account entries (banker’s checks, bills of exchange, promissory notes, and other “payment instruments,” such as credit transfers and direct debits)
In 2000, the “Electronic Money Directive 1” (Directive 2000/46 of September 18, 2000) first defined electronic money as “an electronic substitute for coins and banknotes, which is stored on an electronic medium such as a smart card or computer memory and which is generally intended for making electronic payments of limited amounts.“
In this first version, it constitutes a new cashless payment instrument, intended to carry out a payment transaction associated with an account.
The Electronic Money Directive 2 (EMD2)
In the 2000s, the digital economy exploded, accelerating the introduction of new payment instruments designed to simplify transactions and payment processes.
In 2009, the Electronic Money Directive 2 (Directive 2009/110/EC of September 16, 2009) filled certain gaps observed in the original version, in order to pursue the European Union’s desire to create “a clear legal framework to strengthen the internal market” and “ensure an adequate level of prudential supervision.” This notably involves the creation of the autonomous status of Electronic Money Institution (EMI) and the prudential supervision obligation for these new entities.
Definition
It was in 2013 that the DME was transposed into French law by the law of January 28, establishing the definition of electronic money as we know it today.
Within the meaning of Article L. 315-1 of the French Monetary and Financial Code, it constitutes “a monetary value stored in electronic form, including magnetic form, representing a claim on the issuer, which is issued against the remittance of funds for the purpose of payment transactions […] and which is accepted by a natural person other than the electronic money issuer.“
This definition clarifies the scope of application of electronic money, introduces certain related concepts (prepayment, electronic money media, etc.), and defines it, above all, as a true “payment service” in its own right.
How electronic money works
In practice, this form of money follows a cycle (issuance/storage/use) involving three parties:
- The holder (end customer): The person who purchased or received the electronic money medium.
- The acceptor (merchant): The person who accepts payment using the electronic money medium.
- The issuer: The Electronic Money Institution (EMI) that issues the electronic money.
1 | Issuance
In accordance with the Monetary and Financial Code, electronic money is based on the concept of prepayment. Therefore, we do not speak of “creation,” but rather of the issuance of electronic value.
Upon purchase or creation of the medium in ISO currency, the equivalent in EM is immediately issued and secured by the Electronic Money Institution in charge.
2 | Storage
Once issued, this value is stored on a medium, backed by an electronic money account, which is different from a traditional bank account. The supports can be multiple:
- Prepaid payment card: Visa, Mastercard, etc.
- Prepaid gift card: Credit card, multi-brand card, single-group card, etc.
- Electronic wallet / Electronic money wallet: Wallets for exchanging funds between individuals, wallets on sales platforms (second-hand goods, services, etc.), sports betting accounts, etc.
3 | Use
When electronic value is confined to a medium, it can be used at any time by the end customer, within the defined network of acceptors (exchange platforms, merchant networks, etc.).
What are the use cases for EM?
This technology primarily addresses two usage contexts:
- Enable customers to load an amount via a traditional payment method and then freely use these funds later within their network of acceptors (purchase of a gift card, loading a digital wallet usable in a marketplace or merchant network, etc.)
- Facilitate the payment of small amounts to customers for the sale of a product or service, or the receipt of compensation (sale of a product or service on a C2C platform, payment of a refund or credit note, etc.)
For merchants, it allows for immediate value exchanges, without bank fees, while limiting the risk of fraud (security and compliance ensured by the responsible EMV).
