Friday, October 17, 2008

Virtual currencies stifled by regulation?

(via panGloss, The Register and Out-Law) Roll back the time to 1999. The internet was relatively new, electronic commerce was still a buzz-word, and everybody was talking about electronic cash, virtual currency and Mondex. In the future we would have relinquished our reliance on paper money, and we would be conducting our everyday commercial transactions with a combination of smart cards, RFID chips and mobile phones. The European Commission, in a characteristic surge of regulatory vigour, drafted several directives dealing with e-commerce, including the Electronic Money Institutions Directive, the legal skeleton supporting the frame of the brave new incorporeal marketplace.

Fast forward to 2008. My trousers are still jingling with coins. I look into my wallet and those pesky pieces of paper are still there. True, I have several smart cards, but those chips are inserted into "traditional" payment methods, such as credit and debit cards. Whatever happened to our dream of electronic money?

The European Commission conducted a consultation process that looked at the topic of e-money, and the findings are troubling. There are only 20 electronic money institutions in the entire EU, and the issued value amounts only to 1 billion EUR. The consultation unearthed some problems with the existing legislation that stifles the provision of electronic money. The impact document states that:

"During the review process, stakeholders expressed concerns that the current directive lacks legal certainty. First of all the definition of electronic money is considered unclear. Second it is unclear for stakeholders whether or not it is applicable to certain business models such as certain prepaid payment from mobile network operators and electronic vouchers."
So, we should blame the legislation for the lack of electronic money... or should we? True, I am on record criticising the EMI directive, and how the definitions were pretty useless when looked at closely. PayPal pretty much exploded the system when it was declared an EMI, an later became a bank. Similarly, I have always been averse at proactive regulatory efforts because it is my strong belief that they usually fail miserably in reading technological advances. The regulatory landscape of electronic commerce and information technologies is filled with the carcasses of failed and/or ineffective pieces of legislation drafted with specific technologies in mind.

Nevertheless, I do not think that the EMI directive is to blame. I blame the efficiency of traditional payment systems. Why have an extra cash card, when debit cards will suffice for most transactions? Why try to jump-start the electronic money market, when PayPal dominates electronic payment systems? Moreover, electronic money has not taken off in jurisdictions that never enacted the EMI directive, which tends to confirm in my mind that the problem is one of consumer confidence and lack of a "killer app" in the field of electronic money.

Last year I asked a simple question to my students for their essays: “Virtual in-game currency, such as Linden Dollars, is electronic money as defined by the Electronic Money Directive”. I got some excellent answers as a result (I'm hoping LawClanger will publish his essay), which served to confirm that the directive was bursting at the seams when confronted with real-life examples. I still think that virtual currencies could be classed as electronic money, and the admission of regulatory defeat by the Commission has served to confirm my suspicions; I believe that the growing economic importance of virtual currencies will eventually prompt the recognition of virtual currency as valid electronic money. Hopefully, the more generic definitions contained in the new directive proposal will serve to that effect.

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