The ability of electronic money to disrupt the integrity and stability of the financial system, as well as cause losses to business entities, determines the need for their regulation.

Systematically, e-money regulation can be characterized through the description of five main elements: object, subject, objectives, tools and technology of regulation.

In our study, both e-money itself and private financial institutions that put it into circulation are subject to regulation. Central banks of the Group of Ten countries (G-10), the European Central Bank (ECB), the Bank of Russia, and the Bank for International Settlements, which is an international financial institution, will be considered as subjects of electronic money regulation.

The Working Group, which operates under the auspices of the central banks of the G-10 countries, has formulated the following main objectives for the regulation of electronic money:

- limitation of systemic and other risks that threaten the stability of financial markets or may undermine confidence in the payment system;

- ensuring adequate protection of clients from fraud, unfair practices, financial losses, as well as excessive encroachment in personal affairs;

- support the development of efficient, low-risk, low-cost and convenient financial and payment services for entrepreneurs and consumers;

- ensuring the ability of the central bank to conduct monetary policy;

- not to obstruct the authorities from preventing and detecting the movement of money associated with criminal activities.

In some countries, these objectives may be formulated differently, and they may also have additional specific objectives, such as the creation of fair competitive conditions or the prevention of «regulatory arbitration». In any case, the ultimate purpose of e-money regulation will be the same for all countries. However, the technologies and tools used by regulators will vary from country to country.

There are two main approaches to the regulation of electronic money: liberal and conservative. The essence of the first approach, based on the principles of self-regulation and advocated by the U.S. Federal Reserve (Fed), is to establish a general legal framework for the functioning of e-money systems, the absence of strict regulation of the activities of e-money issuers, the creation of conditions for free competition in this sector of the economy. In other words, the regulatory authorities stand on the position of non-interference in the development of private e-money systems.

In support of the above, we would like to cite a number of statements made by the President and Vice-President of the US Federal Reserve System, A. Greenspan and A. Blinder, as well as by Ludwig, an employee of the Money Handling Controller:

- ...the regulatory role of the authorities should ensure that effective risk management systems are in place in the private sector. As financial systems have become more complex, detailed rules and standards have become both burdensome and inefficient, if not counterproductive. If we want to promote financial innovation, we must not set rules that inhibit it. I particularly stress that we should not hinder the development of our latest innovation, e-money;

- оn behalf of the US Federal Reserve Board, I want to make it clear that the US Federal Reserve Board does not want to hinder the development of the industry or curb its growth through regulation. On the contrary, the Fed supports and will continue to support innovation in payment technologies that benefit entrepreneurs and consumers;

- аt the same time, authorities must be very careful not to hinder the development of a free market.

In practice, the above is reflected in the following. Issuers of electronic money can be any financial institutions (not only banks).

They do not need any special permission to start issuing electronic money. Issuers' activities are not regulated by any special regulations, although some states may introduce special regulations for non-banking e-money issuers.

Currently, the following two regulations apply to e-money issuers on a hardware basis: Rule «E» (limitation of obligations in electronic payments) and Rule «2» (protection of client interests).

As early as 1978, Rule E is designed to protect the interests of clients and defines the basic rights and obligations of clients and «financial institutions» in electronic transactions of client accounts. The term «financial institution» is interpreted broadly enough. Therefore, most issuers of electronic money on a hardware basis fall under the provisions of Rule «E».

Rule E regulates the following activities of e-money issuers on a hardware basis:

- sets out the rules for obtaining permission to issue electronic money;

- determines the terms and conditions of disclosure of information on issued electronic money;

- requires the provision of documentation on the receipt of funds and periodic reports on the status of accounts;

- sets four limits on liabilities to customers;

- details the procedure for resolving disputes with customers.

Rule «E» does not apply to electronic wallets with a maximum storage amount of $100. For wallets with higher storage limits, Rule E applies depending on the type of e-money system. Issuers of offline unaccounted-for e-money systems provide only initial information. Online e-money systems have stricter measures in place for issuers: they report cash receipts and agree on limits on liabilities to customers.

For a long time, there was no consensus in the EU on the regulation of electronic money. For example, in France, Germany, Italy and the Netherlands, only credit institutions were allowed to issue e-money. However, their activities were regulated only by the banking legislation in force in the country. Belgium, Sweden and the United Kingdom had no legal restrictions on the issuance of e-money: it was not only credit institutions that could issue e-money.

However, a study conducted by a European Central Bank (ECB) working group resulted in the formulation of basic principles of e-money regulation policy, which should guide the authorities of all EU member states.

In 1993, the ECB began to study the phenomenon of electronic money, which at the time was represented only by prepaid cards. Based on this analysis, it was recommended that the right to issue e-money be restricted to credit institutions for a number of reasons.

In the middle of the 90s of the last century, the number of new hardware-based e-money systems increased significantly, as well as the emergence of software-based e-money for making payments through computer networks. In this regard, the ECB rethought the trends and published a new report.

This report notes that in the long run, the issue of electronic money will have a significant impact on the monetary policy of central banks. Therefore, the ECB considers it important to establish the following minimum requirements for e-money systems

- prudential supervision: e-money issuers should be subject to prudential supervision;

- reliable and transparent legal support: the rights and obligations of all participants (users, issuers, traders and operators) of the e-money system should be clearly defined and published;

- technical security: e-money systems should have adequate technical, organizational and procedural safeguards to prevent, deter and detect threats to system security;

- protection against criminal encroachments: The design and implementation of e-money systems should take into account the need for protection against their use for illegal purposes, such as money-laundering;

- monetary statistical reporting: e-money systems should provide the central bank with any information that may be required to implement monetary policy;

- redeemability: issuers of electronic money should be subject to a legal obligation to redeem, i.e. to exchange them for money of the central bank at nominal value;

- reserve requirements: the central bank shall be able to impose reserve requirements on all issuers of electronic money.

In addition, the ECB expert group recommended to allow the issuance of electronic money to non-banking institutions as well.

In September 2000, the European Parliament adopted two directives aimed at regulating electronic money activities.

The literature highlights the following main objectives of the adopted directives. First, to protect consumers and guarantee their privacy. To this end, a prudential framework has been developed to guarantee the financial integrity and stability of e-money institutions. In addition, consumers have the right to exchange their e-money for banknotes and coins from the central bank at nominal value at any time.

Second, to promote the development of a single market for financial services. E-money institutions can obtain a «passport» (single license) that allows them to operate in all EU countries, provided that they comply with the principles of the First EU Banking Directive on Mutual Recognition of Licenses and Prudential Supervision, as well as the principles of control of their home EU Member State.

Third, to avoid any violation of competition rules between traditional credit institutions and electronic money institutions. To this end, less stringent prudential treatment of e-money institutions is compensated by restrictions on their business activities and investments.

According to the adopted directives, only credit institutions can issue e-money. However, the very notion of «credit institution» has been expanded. Whereas previously a credit institution was defined as «an enterprise whose activities consist of accepting deposits or other funds to be repaid from an unlimited number of persons and providing loans at its own expense», nowadays, according to Directive 2000/28/EC, credit institutions should also include electronic money institutions.

In turn, Directive 2000/46/EC defines the term «institution of electronic money» as follows «any legal entity other than a credit institution that issues means of payment in the form of electronic money.

Thus, the institutions of electronic money are included in the composition of credit institutions along with traditional monetary institutions.

One of the main reasons why e-money institutions are included in the concept of «credit institution» is the ECB's desire to be able to set up reserve requirements for them. The ECB believes that «this ECB's ability to set reserve requirements and statistical reporting requirements is crucial, especially in terms of ensuring preparation for the substantial growth of electronic money and its impact on monetary policy.

Directive 2000/46/EC establishes the following basic requirements for non-banking issuers of electronic money:

а) the initial capital and the amount of own funds:

1) the amount of the initial capital must be at least EUR 1 million (for banks the requirement is EUR 5 million);

2) the minimum and constant own funds must not be less than 2 % of the current or weighted average financial liabilities on issued electronic money for the last six months (for banks the same requirement is 8 %);

1. b) restrictions on investments of electronic money institutions:

1) investment of free funds is strictly limited and, among other requirements, should not be lower than the financial liabilities for issued electronic money. It is possible, for example, to invest in assets with zero risk and high liquidity, in demand deposits with zone A credit institutions;

2) investments can be up to 20 times the value of the e-money institution's own funds;

1. c) restrictions on the activities of e-money institutions:

1) e-money institutions can issue e-money, provide related financial and non-financial services and issue and manage other means of payment;

2) e-money institutions are prohibited from providing any form of credit.

The analysis of the above requirements shows that less stringent requirements to the capital of e-money institutions (in comparison with banking institutions) are compensated by significant limitations of their business activities. According to Article 7 of Directive 2000/46/EC, in order to ensure financial soundness, e-money institutions should have prudent management, administrative and accounting procedures, as well as adequate internal control mechanisms.

It should be noted that back in the mid – 1990s ECB experts were members of a working group under the aegis of the Basel Committee on Banking Regulation and Supervision and the central banks of the Group of Ten (G-10) countries. As a result of the joint research, the main types of electronic money risks were considered and recommendations on their management were developed.

Mass distribution of bank cards in the world in settlements, payments, credit relations proves that the use of this banking tool significantly simplifies the relationship between sellers and buyers of goods, works, services, withdrawal of cash from the accounts of individuals. For the population of most countries, this is the main way to store and protect savings [13, p. 35]. A bank card allows its holder to make purchases or receive cash at any time of the day promptly and practically in most countries of the world, controlling the status of the bank account in real time. Bank cards have become a powerful consumer credit instrument, mediating the strategy of sellers of goods and services in terms of discounts and customer loyalty programs. Finally, this payment system allows the population to control the size and structure of their expenditures over time [14, p. 68].

Improving the efficiency of the national economy, success in global competition with the use of national natural or accumulated advantages depends largely on the organization of payment systems, their reliability and convenience for all market participants [15, p. 28]. States interested in transparency of financial flows (e.g. retail, catering, transport), reduction of payment system costs, growth of consumer credit and development of retail banking usually seek to develop a system of bank card payments, including special measures to reduce the scope of cash settlements [16, p. 222].

In the process of transition from a planned to a market economy in Kazakhstan, there has been a constant dilemma of creating certain systems, especially legal and business systems, either anew or by compiling and adapting existing global practices to the country's mentality.

The mechanisms of functioning of the financial system in the world are rather well developed. In this area, it is important that Kazakhstan's internal rules of the game do not create unnecessary barriers and additional transaction costs that would reduce the impact of the spread of generally accepted standards based  on international experience.

Early development of card systems in the world fell on the 50–60s of the twentieth century in the United States. These years were characterized by large-scale growth and globalization of the national economy, which served as a prerequisite and a powerful catalyst for the emergence of payment systems in the country. In the context of our study, we would like to point out that there are certain parallels with the current situation in Kazakhstan, where the growth of income and consumer opportunities, as well as the behavior of government regulators is largely (and much more than in the US in the 60s) determined by the shocks of the transition period and the crises of 1998 and the current period.

The table 4 compares the factors and signs of development of payment systems of the USA and the Republic of Kazakhstan. The temporary mismatch as well as the difference in mentality of economic entities of financial relations are taken into account as assumptions [17].

Since 1958, the Bank of America in California and Chase Manhattan Bank in New York began issuing universal credit cards for the first time, American Express was preparing for the introduction of its first payment card, and eight years later Diners Club appeared.

 

Table 4 – Comparative characteristics of the development of payment systems in Kazakhstan and the United States

Comparative sign	USA	RK
Prerequisites	-      large-scale growth of the national economy; -      Growth of income and expenses of consumers; -      the need of the economy for highly efficient financial instruments; -      NTP's achievements at the system development stage	-      Transformation of the economic structure in the 90s of the twentieth century; -      the need for efficient financial instruments in the economy; -      achievements of the NTP at the stage of system development; -      Availability of global evolutionary experience in the development and functioning of diverse systems
Aims and objectives	-      Creation of a consumer lending instrument; -     Ensuring the efficiency, security and effectiveness of payments within the national and later global economies	-      integration into the global financial market; -      reduction of cashless turnover; -  Reducing costs in the economy; -      penetration of modern payment technologies into socially important spheres; -      stimulating the attractiveness of payment systems for market participants
Methods and mechanisms	-      Initially, the disorderly development of separate competing systems headed by the leading bank based on its settlement capabilities; -      development of credit and trade cards, which later became universal); -      Globalization of payment systems with the creation of associations providing reliable infrastructure and quality services	-      use of foreign payment systems and their infrastructure by Kazakhstani issuing banks; -      application of foreign technologies in creation of local card systems; -      fragmented, non-integrated development of individual payment systems
Results	-      formation of market-competing payment systems that have received the status of global payment systems; -      penetration of electronic payment technologies in all spheres of the economy	-      conquest of the market by foreign payment systems with weak development of domestic systems and technologies; -      Insufficient coverage by electronic payment technologies of the country's territories and separate spheres of the economy

 

 

In 1966, the four largest banks in California merged to issue a card called Master Charge. At the stage of formation there was a disorderly development of several competing systems promoted by groups of banks, usually united around the leader on the basis of his settlement possibilities.

The development of consumer credit in the United States in the 1960s stimulated the issuance of credit cards, which began to be actively issued by both banks and trade organizations. Banks, consortia of banks that grant loans to customers and do not grant loans, began to offer not only the most famous types of credit cards (BankAmericard and Master Charge), but also out of circulation to date, such as Everything Cards, Town & Country Cards, Midwest Bank Cards, Interbank Cards. The world's leading system today – Visa – evolved from a key bank, Bank of America, which licensed the participation of other banks based on its settlement capabilities, to an association. Even at that time it was supposed that the main thing in bank cards was not so much a loan as an opportunity to create a global system of cashless payments.

The stage of card updating as a crediting instrument began in Kazakhstan in the first half of the 2000s, which was characterized by quantitative expansion of issuing banks, on the one hand, and the increase of incomes and living standards of the population, on the other hand, and a corresponding coincidence of economic interests of card service providers and consumers.

Thus, by the 70s a modern system of international and national non-cash card systems had already been established, represented by the main world payment systems. By now Visa is an association of more than 21 thousand banks from 190 countries. These banks are co-owners of Visa and determine the rules of the Association's activities [18]. The officially announced goal of the Visa Association is to facilitate the business of the member banks, to assist them in the implementation of their tasks by providing them with reliable infrastructure and quality payment system services.

Different approaches to the regulation of e-money by different countries can be explained by their desire to find the best solution to the efficiency-risk dilemma. There are a number of serious challenges for regulators in addressing this dilemma.

Firstly, excessively strict regulation of e-money systems can certainly significantly reduce the risks accepted by the participants of these systems, but on the other hand, it will lead to an increase in their costs for compliance with regulatory rules and regulations, and thus to a decrease in the efficiency of e-money systems. At the same time, the lack of regulation will mean that the most efficient e-money systems will survive in a competitive environment, but the risks to participants will be very high.

Secondly, the current level of technological and financial innovation allows issuers and providers of electronic money to move from one jurisdiction to another quite easily. In other words, if regulation in a given jurisdiction is too stringent, issuers and providers are free to move to a different jurisdiction with less stringent regulation. This creates an enabling environment for criminal activity, namely, money laundering and tax evasion. In addition, there is an increased risk of fraudulent transactions.

Third, issuers and providers in jurisdictions with weak regulation and providing services in highly regulated jurisdictions have a competitive advantage over issuers and providers in highly regulated jurisdictions.

In this context, it is crucial for different countries to strike a balance between the effectiveness of financial systems and the risks posed by the private sector by harmonizing and cooperating in the establishment and implementation of uniform e-money standards and regulations.

With regard to the regulation of electronic money in the Russian Federation, the following should be noted. In our country there are no special normative documents regulating the activity in the sphere of electronic money. Moreover, the Russian legislation does not contain any special norms regulating the issue and circulation of electronic money in the territory of the Russian Federation, as well as defining the status of institutions that can issue them, but even this concept itself. At the same time, some authors say that the Civil Code of the Russian Federation already contains the necessary provisions describing the electronic document flow. And on this basis, a number of documents and instructions of various organizations, including the Bank of Russia, have already been successfully implemented.

In accordance with the Federal Law «On the Central Bank of the Russian Federation (Bank of Russia)», banknotes and coins of the Bank of Russia are the only legal tender in the Russian Federation (a similar provision is contained in the Civil Code of the Russian Federation). Banknotes and coins are unconditional obligations of the Bank of Russia and are secured by all its assets. The use of cash surrogates is prohibited.

In other words, the use of settlement and payment means, the logic of which is based on the model of cash turnover, is not allowed.

The term «prepaid financial product» is the closest to the concept of electronic money.

Much further progress has been made in the regulation of electronic money in the Republic of Belarus, whose experience is particularly interesting from the perspective of creating an alliance between the Russian Federation and the Republic of Belarus with a single currency.

Taking into account the world experience of splitting prepaid payment instruments into electronic money cards and cards with full account of operations, a resolution of the Board of the National Bank of the Republic of Belarus «On Minimum Requirements for Carrying out Operations with Electronic Money Bank Cards» was adopted.

In accordance with this Resolution, operations with electronic money cards in the territory of the Republic of Belarus may be carried out only by banks. No special permission is required to carry out such operations. Transactions are carried out within the authority granted by their licenses of the National Bank of the Republic of Belarus, but it is necessary to submit to the National Bank a notice of the beginning of transactions with electronic money cards.

Transactions with electronic money cards are divided into issue and distribution. The issuing bank shall be obliged to redeem electronic money to the bearer, and in case of distribution – the agent bank shall not bear these obligations, but shall be only an intermediary between the issuer and the cardholder.

The National Bank of Moldova shall supervise the activity of banks issuing electronic money cards. Issuing banks shall comply with economic standards and reserve requirements. The National Bank shall have the right to increase the amount of funds contributed to the mandatory reserve fund for banks issuing e-money cards, as well as to establish the maximum amount of funds and type of currency that can be recorded on the e-money card.

In addition, the National Bank establishes special requirements for issuing banks in the field of legal and methodological support, as well as technical security and protection against criminal encroachments.

Thus, we have considered the main approaches to the regulation of electronic money. The last issue to be considered in this paragraph concerns the recommendations of various scientists regarding the increase of the efficiency of the central bank's monetary policy in the conditions of high level of e-money development.

As noted earlier, e-money can reduce the efficiency of the monetary policy pursued by the central bank due to the decrease in demand for its money. In this regard, Harvard professor B. Freedman suggests that the central bank should be protected by two measures: constantly expanding the list of monetary substitutes subject to mandatory reserve regulation, and using the requirements to make payments to state companies and authorities (including tax payments) only with traditional money.

It should be recognized that the issue of reserve requirements, along with the issue of the status of e-money issuers, is one of the most fundamental and important in the field of monetary regulation. And this issue is being addressed by the competent authorities of developed countries in an ambiguous manner. Whereas in the EU countries there is only the possibility of establishing reserve requirements for electronic money, in Japan, under the Prepaid Cards Act, electronic money issuers are required to reserve at least 50 % of the issue volume, and in the USA, even the possibility of establishing such reserves for electronic money issuers is absent.

Reserve requirements cannot be attributed to effective monetary regulation instruments. On the one hand, this instrument is not flexible enough, but on the other hand, in the absence of a globally uniform approach to regulation, e-money issuers are free to change jurisdictions with high reserve requirements to jurisdictions where reserve requirements are low or non-existent.

In addition to establishing reserve requirements, University of California scientist A. Behrensen offers the following activities. Firstly, the central bank can issue e-money on its own, and secondly, it can use the appropriate monetary regulation tools.

As the world practice shows, central banks can issue electronic money similarly to paper money. For example, the Bank of Finland is developing an electronic money system on a hardware basis through the controlled company Avant Finland Ltd. At the same time, according to the experts of the Bank for International Settlements, the issue of electronic money by central banks may limit competition and reduce the motivation of the private sector to further develop electronic money.

According to a number of scientists, in particular, the Deputy Governor of the Bank of Canada, Mr. Ch. According to a number of scientists, including C. Gudhart, Professor at the London School of Economics, and Princeton University Professor of Economics, central banks will be able to effectively regulate money circulation in the context of large-scale use of private electronic money. However, for this purpose, central banks need to change the way they regulate interest rates from indirect methods (open market operations) to direct methods (channel system of interest rate regulation).

The mechanism of the «channel» system is as follows. The central bank determines the overnight target interest rate, and then periodically changes it in accordance with current economic conditions; at the level of «target rate plus 25 basis points» sets the credit rate at which the central bank offers loans overnight to commercial banks; at the level of «target rate minus 25 basis points» the deposit rate at which the central bank attracts deposits from commercial banks is fixed.

Thus, the target rate is in the middle of the «channel», whose lower boundary is the deposit rate, and the upper boundary is the credit rate. «The «channel» system already operates in one form or another in Australia, Canada and New Zealand and, according to M. Woodforth, «remains highly effective even in the face of the most radical technological changes predicted today.

Analysis of the practice of electronic money regulation by different countries allows us to draw the following conclusions.

First, there are two main approaches to e-money regulation: conservative and liberal. The choice of approach depends on the solution of the dilemma: the efficiency of the financial system - the risks accepted by the private sector.

Second, the cornerstone of e-money regulation is the determination of the legal status of the issuer of e-money and the establishment of regulations and restrictions on its activities.

Third, significant differences in regulatory approaches make the use of e-money for criminal purposes attractive: fraudulent transactions, money laundering, tax evasion. In this context, it is crucial for different countries to find a compromise by harmonizing and cooperating in the development and application of uniform standards and rules for the regulation of electronic money.

Fourth, in the conditions of mass use of electronic money, the central bank should change the emphasis in the application of monetary regulation instruments.