The world is currently witnessing the fourth industrial revolution or Industry 4.0. Meanwhile, the debate on stablecoin vs e-money is growing as the dynamics of industries “is characterized by a range of new technologies that are fusing the physical, digital and biological worlds, impacting all disciplines, economies and industries, and even challenging ideas about what it means to be human”. Market players are now turning to crypto-assets and the underlying blockchain technology to transact with one another. Digital assets such as e-money and stablecoins have become hot topics for global players and market leaders to merge the finance and crypto industry together to create new financial products.
What is E-Money?
E-money or electronic money is the money balance recorded on a stored-value card or remotely on a server. The term ‘stored-value card’ means the funds or data are ‘physically’ stored on the card, in the form of binary-code. With prepaid cards, the data is maintained on the card issuer’s computers. Typical stored-value cards includes: prepaid calling cards, gift cards, payroll card, loyalty cards, travel cards.
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 can either be centralized or decentralized depending upon where the control over the supply comes from the various sources. E-money can also be stored on mobile phones or in a payment account over the Internet. The most common and widely used mobile subsystems are Google Wallet and Apple pay.
The 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).
What Are Stablecoins?
Stablecoins differ from e-money from the fact that e-money is only limited to the infrastructure of the issuing/ business i.e. closed-loop systems like PayPal.
Wikipedia defines Stablecoin as:
Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets. A stablecoin can be pegged to a currency, or to exchange traded commodities (such as precious metals or industrial metals). Stablecoins backed by currencies or commodities directly are said to be centralized, whereas those leveraging other cryptocurrencies are referred to as decentralized
The basic characteristics of Stablecoins are described in the first Electronic Money Directive (2000):
“electronic money” shall mean monetary value as represented by a claim on the issuer which is:
stored on an electronic device;
issued on receipt of funds of an amount not less in value than the monetary value issued;
accepted as means of payment by undertakings other than the issuer.
Bottomline: Can Stablecoins Be Classified As E-Money?
Stablecoins were under study by a number of publications issued by the ESAs, the European Central Bank (“ECB”) and other European regulatory authorities. The prevailing concerns surrounding Stablecoins is their proximity to E-money– a payment instrument regulated under the Electronic Money Directive (Directive 2009/110/EC) (“EMD2”).
The ECB Crypto-Assets Task Force stated in one of its paper series that “some stable coins, to the extent that they have an identified issuer, are not crypto-assets according to the definition used in this paper and might qualify as e-money under some national legislation”.
Mario Draghi, President of the ECB, emphasised that “from a regulatory perspective, stable coins, like any other emerging financial product, should be subject to the “same business, same risks, same rules” principle based on a comprehensive assessment of their functionalities”, effectively bringing Stable Coins possessing the necessary elements of e-money within the scope of the EMD2.
In conclusion, there are no clear guidelines on whether crypto-assets such as Stablecoins, classify as E-money. It ultimately depends on the elements constituting those particular crypto-assets, the interpretation of EMD2 or laws surrounding e-money in the respective jurisprudence and the arguments presented for and against such classification. What sets apart e-money from stablecoins is the underlying blockchain technology and the associated features within it.
Data Sources/ References: World Economic Forum, The Fourth Industrial Revolution | Bank For International Settlements | European Central Bank | European Central Bank: Crypto-Assets | NovoLegal | BlockGeeks