Electronic money has the potential to increase the efficiency of the existing settlement and payment system. First of all, it is expressed in the reduction of material and time costs borne by banks, trade enterprises and the population. Electronic money has a number of advantages, which were discussed earlier, which makes it more attractive than other payment instruments.

At the same time, e-money also carries serious risks, which can result in significant financial losses for its users.

In the economic literature, the category «risk» is considered in a rather diverse way: there are many approaches to its definition. Without claiming scientific novelty in this area, we will use the definition proposed by the famous Russian scientist  A. P. Algin. In his monograph «Risk and its role in public life» he closely links the content of the concept of risk with the term «risk situation». The latter is understood as a kind of uncertain situation, when the onset of events is probable and can be determined, that is, in this case, objectively there is a possibility to assess the probability of events. Striving to «remove» a risky situation, the subject makes a choice and strives to realize it. This process finds its expression in the concept of «risk». The latter exists both at the stage of choosing a solution and at the stage of its implementation. And in both cases, the risk is a model of removal of uncertainty by the subject, the way of practical resolution of the contradiction in the alternative development of opposite trends in specific circumstances.

With regard to the implementation of practical actions in a risk situation,  A. P. Algin singles out three main elements of risk:

- probability of obtaining the desired result;

- probability of undesirable consequences during the choice of an alternative and its implementation;

- probability of deviation from the chosen purpose. Thus deviations both negative, and positive properties are possible.

In spite of the huge interest shown to electronic money, both in domestic and foreign economic literature there are practically no works devoted to problems of risks of electronic money. But it is this issue that is one of the key issues determining the possibility and effectiveness of electronic money development. Identification of the main types of risks of electronic money, their systematization will, in our opinion, reduce the level of risks of electronic money taken by economic entities, or generally avoid them.

There is not a word about possible risks of electronic money in the textbooks of higher educational institutions on the course «Electronic commerce». A similar situation can be observed in many other works of domestic scientists dealing with the problems of electronic money.

The article by A. B. Shamrayeva, «The Money Component of the Payment System: Legal and Economic Approaches», has a section devoted to the problems of risks in e-money systems. In this article, the author identifies five main types of risks of electronic money - the risk of loss of liquidity, credit risk, legal risk, operational risk and the risk of loss of manageability – as well as the factors that determine them (see table 2).

In addition, A. B. Shamraev notes that in the event of uncontrolled issuance of electronic money a sharp increase in the money supply and acceleration of inflation rates can occur – the risk of inflation.

 

Table 2 – Characteristics of electronic money risks

Type of risk	Definition	Risk factors
Risk of loss of liquidity.	Risk of non-fulfillment of obligations by the issuer as a result of insufficiency of its assets	issue of electronic money in the absence of sufficient assets for their repayment; risky placement of assets intended for repayment of electronic money
Credit risk/p>	risk of losses for the issuer as a result of non-fulfillment (improper fulfillment) of its obligations by customers or third parties (participating banks, settlement banks, etc.)	failure to repay or untimely repayment of loans granted to customers (in case of credit schemes); non-payment or untimely payment by customers of the issuer's services
Legal risk	Risk of loss due to actions or events of a legal nature	Non-compliance of the rules of the electronic money system with the current legislation; violation of the current legislation by the issuer or customers; changes in the legislation
Operational risk	Risk of losses due to deficiencies in the system organization or abuse of persons having access to the system	Deficiencies in the technical implementation of the system; actions (including criminal) of the issuer's employees; adverse technological impact and actions (including criminal) of third parties
Risk of loss of control	Risk of loss as a result of loss of control over any of the above risks by the issuer's management	Insufficient consideration of other risks; inefficiency of management personnel

 

The above risks do not exhaust the entire list of electronic money risks. In the report prepared by the experts of the Bank for International Settlements (BIS), besides the above mentioned risks, the following electronic money risks are singled out: reputation risk, interest rate risk and market risk.

Reputation risk is a risk of losses, including loss of current and/or potential customers, due to negative public opinion about this electronic money system.

There are many reasons for reputational risk. At the same time, it should be taken into account that this risk may arise both as a result of actions (or inaction) of the participant of the electronic money system, and as a result of actions of a third party. Violation of the security of the electronic money system as a result of external attacks by hackers («hackers») may undermine the credibility of the system. In this case, the reputation risk will be caused by the actions of a third party. If customers are unable to make transactions with electronic money due to technical problems with communication networks, which can also undermine the trust in the system of electronic money. In this case, the fault lies with the organizers of the system.

Realization of reputation risk may have negative consequences not only for one system of electronic money, but also for all other systems. The monetary loss of customers due to the mistakes of another financial institution issuing similar or similar electronic money may result in customers being suspicious of all e-money systems.

As with traditional banks, e-money issuers take on interest rate risks. These risks should be understood as the risk of losses due to unfavorable changes in interest rates for the issuer of electronic money. As a result of unfavorable changes in interest rates, the value of the issuer's assets may decrease relative to the liabilities on electronic money issued in circulation.

Closely related to interest rate risk is market risk, which is the probability of financial losses on balance sheet and off-balance sheet transactions as a result of changes in market prices, including foreign exchange rates. Issuers accepting currency in payment for electronic money are exposed to currency risk.

It should be noted that electronic money can act as a risk factor in the currency markets. Modern development of information and financial technologies allows to freely enter the currency market for almost anyone. Among other things, this right can be used by the owners of electronic money. The growth of participants in the foreign exchange market can provoke an increase in speculative operations and, thus, affect the exchange rates.

In the Western economic literature, special attention is paid to such a risk of electronic money as systemic risk. Systemic risk is usually understood to be the risk of default by one of the participants in the system or the failure of the system itself, which would result in other participants in the system or financial institutions in other sectors of the financial system being unable to meet their obligations on time. The implementation of systemic risk may lead, firstly, to a breach of stability and integrity of the financial system and, secondly, may undermine the trust in electronic money on the part of consumers (first of all, the public). Moreover, the implementation of systemic risk, at a time when e-money systems are still in their infancy and the level of confidence in them is low, may slow down the development of e-money for a long time.

One of the most significant systemic risks is the risk of Herschtat. This risk is related to the system of interbank payments and represents the probability of financial losses as a result of temporary delay in payment. Non-performance of the payment by the counterparty in due time can lead to bankruptcy of the other party. The likelihood of Herstat's risk occurring is particularly high in the context of private electronic money systems.

The above risks have a direct impact on the financial position of e-money issuers and indirectly affect the activities of e-money consumers. At the same time, there are risks that have a direct impact on e-money consumers.

The report, prepared by a working group under the auspices of the central banks of the Group of Ten (G-10) countries, identifies three major risks to e-money users.

First, as with any other payment instrument, e-money owners may face the risk of financial loss. Financial risks may arise from intentional actions such as stealing a plastic card containing electronic money, forging or intercepting electronic communications sent via computer networks. In some cases, e-money can cause financial loss for reasons other than those of other forms of payment, such as if the transaction records are not sufficiently detailed to allow for the rapid resolution of errors or disputes.

Consumers may also suffer financial losses if the issuer of electronic money becomes insolvent, bankrupt and unable to meet its obligations to e-money holders.

Second, as with any other payment instrument, e-money owners may face the risk that they will not be able to make payments in full, on time and at a specified location, even though they have sufficient funds to do so. This risk also arises when other payment instruments are used, for example, in the form of credit card deactivation or refusal to accept cheques.

 

Finally, thirdly, e-money owners may face the risk that information about an e-money transaction may be disclosed without authorization for fraudulent purposes. Most current e-money systems do not allow anonymous payments. Even if the consumer is not identified, for example, in the case of electronic money purchased with traditional cash, it is still possible to track electronic money transactions by the technical device on which they are stored.

It should be noted that special attention is paid to the risks of electronic money fraud in Western literature. The report, prepared jointly by the specialists of the Committee on Settlement and Payment Systems of the Bank for International Settlements and experts in the field of information and computer technologies of the central banks of the Group of Ten countries (G-10), highlights the following types of risks of e-money fraud:

- the risk of duplication of technical devices;

- the risk of changing or duplicating information or programs;

- message change risk;

- the risk of theft;

- transaction failure risk.

Duplicate technical device risk is the risk of loss resulting from the creation of a new device by a fraudster that accepts e-wallets as the current one. A copy is made of the e-wallet, including its cryptographic keys, account balances and other important information. Alternatively, fraudsters may create an electronic wallet that functions as a real wallet but contains fraudulent balances.

Another risk of fraud may be the alteration of the information stored in the e-wallet. For example, if the balances on the card have been increased fraudulently without visible card breakdowns, the holder may perform transactions from the card, which will seem real to the trading terminal. In addition, the internal functions of the e-wallet, such as reporting procedures, may be altered so that the calculation is not performed as required. Changes to the data or functions of the e-wallet may be made due to the poor security of the operating system, or by physically impacting directly on the e-wallet chip itself.

Message risk is the risk of loss due to changes in the data or processes of a technical device by deleting, replicating or replacing messages. Messages between technical devices may be intercepted by fraudsters at the time of their transmission over telecommunication lines, computer networks or in direct contact between technical devices.

The risk of theft is the probability of losses due to theft of a technical device and illegal use of the balances recorded on it. Data stored on a technical device can also be stolen through illegal copying. For example, a fraudster may intercept communications between the legitimate owner of electronic money and its issuer, and then use the intercepted data in any transactions. Such theft will only be detected after the issuer has received true electronic money, which has similar characteristics to the illegal money. By then, the fraudster will have already benefited financially.

Fraud can also be a completely different way of rejecting transactions made with electronic money. For example, in remote transactions conducted by telephone or computer networks, the user may claim that he or she has not allowed the transaction to take place. This, in turn, may result in financial losses to the merchant or issuer of electronic money.

The literature identifies the following as the key drivers for the commission of fraud in various payment instruments, including electronic money. First, the nominal value of a payment instrument. Income from fraud with a payment instrument should exceed its costs. Fraudsters have little or no interest in forging coins because their face value is much less than the cost of creating them.

Second, control. The ability to determine the existence and ownership of a payment instrument, for example, online for debit or credit cards, reduces the risk of fraud.

Third, anonymity. The likelihood of fraud increases if the owner of the payment instrument cannot be identified.

Fourth, the location of the transactions. If the seller can refuse to deliver the goods until he or she is satisfied that the payment instrument is legitimate, the risk of fraud is reduced. If the goods are delivered immediately, at the time of payment, there is always a chance that the payment instrument presented is false.

Fifth, fifth, the distribution of losses. There are different rules regarding the allocation of losses between the owner of the means of payment, the merchant and the issuer of the means of payment. The probability of fraud depends on how the losses are allocated.

The above reasons may in one way or another lead to e-money fraud. The case of Japan in the mid – 1990s is cited as a good example in Western literature.

Japanese companies Sumitomo Corporation and Mitsubishi Corporation, together with Nippon Telephone and Telegraph, with the participation of various government agencies, have developed an electronic wallet with a maximum storage amount of 50 and 100 U.S. dollars for use in billiard rooms. One of the main objectives of the e-wallet was to limit criminal activity, especially tax evasion and money laundering.

The amount of money stored on the map was presented in the form of data recorded on a magnetic tape. Criminal organizations were able to bypass the e-wallet security system by cloning, i.e. by transferring (duplicating) the data recorded on a valid card to the card already used. Then the cloned electronic wallets were presented in billiard wallets for cash exchange. Since the issuers of the e-wallet could not distinguish between fraudulent and legitimate transactions, they had to incur financial losses. Experts estimate that the losses on this fraud were at least $600 million. The losses were estimated to be at least $600 million.

The high limit on the amount of money stored in the e-wallet, weak security, anonymity in transactions and acceptance of losses by e-money issuers all contributed to the fraudulent use of this type of e-wallet. As A. Pollack notes, only a significant reduction in the limit on the amount of storage in the e-wallet and the strengthening of the security system has reduced the level of fraud.

When considering the risks of e-money, it should be noted that they may be international in nature. The fact is that, as noted by many experts, including representatives of various central banks and international financial institutions, electronic money does not recognize the boundaries, moving freely through telecommunications lines, computer networks from one country to another. Thus, the issuer of electronic money can be located in one country, its owner in another, and the transaction with the use of electronic money to take place in a third country. Accordingly, the risk can be realized in any of these countries.

Types of risks faced by e-money system participants in foreign economic activity are similar to those discussed above.

The ability of e-money to cross borders freely makes it attractive to criminal organisations in terms of money laundering. It is only the existence of limits on the amount of storage and the use of electronic money that prevents them from doing so.

Thus, the circulation of electronic money causes a lot of risks both for an individual subject of the electronic money system and for all participants of the financial system as a whole. Therefore, in the author's opinion, electronic money circulation should be considered, firstly, as a risk-forming factor, i.e. a process contributing to the emergence of a certain type of risk and determining its nature, and, secondly, as an integral risk-forming factor, i.e. it affects several types of risks simultaneously.

On the basis of the conducted analysis for the purpose of increase of efficiency, reliability and safety of functioning of systems of electronic money the author classifies risks of the circulation of electronic money on two signs: level of influence and the subject of risk (see table 3).

Depending on the level of impact, the risks of electronic money circulation can be divided into microeconomic and macroeconomic risks. Microeconomic risks include risks of participants of electronic money systems and we have already analyzed their content earlier.

Table 3 – Classification of electronic money circulation risks

Signs of classification	Type of risk
Impact level	1.Macroeconomic risks 2.Microeconomic risks
The subject of the risk	1. Risks of electronic money issuers: operational risk; reputation risk; legal risk; liquidity risk; fraud risk; credit risk; currency risk; loss of control risk; interest rate risk. 2. Risks of electronic money distributors: liquidity risk; operational risk; credit risk; legal risk. 3. Risks of institutions buying electronic money: operational risk; credit risk; liquidity risk; interest rate risk; currency risk. 4. Risks of clearing and settlement institutions: operational risk; credit risk; liquidity risk; interest rate risk; currency risk. 5. Risks of archival institutions: operational risk; reputation risk. The subject of the risk 6. Risks of trade enterprises: credit risk; operational risk; risk of fraud. 7. Risks of private owners of electronic money: fraud risk, credit risk, currency risk.

 

The following should be singled out among macroeconomic risks of electronic money circulation: inflation risk, foreign exchange risk, and risk of decline in efficiency of monetary regulation instruments.