E-Money on the Agenda of the CJEU
Authors: James Debono at Ganado Advocates
The new year at the Court of Justice of the European Union (“CJEU”) kicked off with a head-scratcher – a preliminary ruling concerning electronic money institutions (“EMI(s)”). This case is of particularly relevance to the Maltese market as it highlights a number of key points which are currently being discussed in the context of the soaring fintech wave hovering over our shores.
The preliminary ruling related to the interpretation of Articles 5(2) and 6(1)(a) of the second Electronic Money Directive (Directive 2009/110/EC or “EMD II”) in ‘Paysera LT’ vs. Lietuvos bankas (or Bank of Lithunia)’, (Case C-389/17) which articles set out the possible methods of calculating the own funds requirements for EMIs for activities referred to in Article 6(1)(a) EMD II that are not linked to the issuance of electronic money.
Paysera LT, a private company incorporated under Lithuanian law, holds licences issued by Bank of Lithuania to operate as an electronic money institution and a payment institution, under which it is authorised to issue electronic money, to provide services linked to the issuance of e-money, as well as other payment services. Following an inspection of Paysera’s operations, the Lithuanian regulator issued a warning to the institution requiring it to remedy an infringement of the regulations pertaining to the calculation of the own funds requirements.
Following a dismissal of Paysera’s action against such decision by the Regional Administrative Court in Lithuania, the applicant brought an appeal before the Lithuanian Supreme Administrative Court. The latter court referred a question to the CJEU whether the below activities could be classified as payment services linked to the issuance of e-money under Article 5(2) and 6(1)(a) of EMD II, namely:
- redemption at the request of an e-money holder from an e-money account to third-party bank accounts (“Service 1”); and
- the collection of payments for goods and services supplied by e-money holders from persons not participating in the e-money system acquiring such goods or services. (“Service 2”).
By way of background, the abovementioned Article 5 sets outs the own funds requirements for payment institutions and EMIs. It is pertinent to note that the rules for calculating own funds requirements in the context of payment services are different from the rules on own funds applicable to e-money services. While the own fund rules applicable to payment institutions are divided into three different methods, entailing complicated mathematical and accounting calculations, the fourth method (Method D) applicable to EMIs, is more straightforward and possibly less burdensome than the other three methods. In fact, Method D merely stipulates that the own funds requirements of EMIs must amount to at least 2% of the average outstanding e-money.
In essence, the referring court asked the CJEUwhether Article 5(2) of EMD II must be interpreted as meaning that services provided by EMIs in payment transactions such as, Services 1 and 2, constitute activities linked to the issuance of electronic money or otherwise. The underlying rationale for this preliminary reference is that Article 5 of EMD II creates an exception to the rules on own funds laid down by Directive 2007/64 (“PSD I”) for payment services linked to the issuance of e-money provided, in so far as those services are linked to the activity of issuing e-money. Therefore, if the payment services are considered to be linked to the issuance of e-money, Paysera LT would fall under the scope and be subject solely to Method D, applicable to EMIs.
In order to determine whether the services in question constitute activities linked to the issuance of e-money, it is necessary to determine whether those services are inherently linked to the issuance or redemption of electronic money. In its judgement, the CJEU decided that Article 5(2) of Directive 2009/110 must be interpreted as meaning that services provided by EMIs in payment transactions such as Services 1 and 2 constitute activities linked to the issuance of e-money, if those services trigger the issuance or redemption of e-money in a single payment transaction.
The question whether the payment services at issue trigger issuance or redemption of e-money is a matter which is to be ascertained by the referring courts in light of the fact that the issue is a merit of proof and not an interpretation of European law. By way of conclusion, Services 1 and 2 are linked to e-money, and therefore Method D comes into play, if and when, in case of Service 1, the redemption involves the sending of funds directly to a third-party bank account without passing through the e-money holder and, in case Service 2, there is acceptance of payment for the product or service upon receipt of funds. The case has now been referred back to the Lithuanian Supreme Administrative Court.
In addition to the above analysis, there is another notable principle which should not go unnoticed, especially in light of the blockchain and crypto fever pervading in Malta. This principle purported by this judgement emanates from recital 8 of EMD II which states that:
the definition of electronic money should cover electronic money whether it is held on a payment device in the electronic money holder’s possession or stored remotely at a server and managed by the electronic money holder through a specific account for electronic money. That definition should be wide enough to avoid hampering technological innovation and to cover not only all the electronic money products available today in the market but also those products which could be developed in the future.
While the matter is not particularly relevant to the contested issue between the Lithuanian parties, it is pertinent to outline that this technology-neutral recital opens the doors to the classification as electronic money of non-conventional products which are constantly being developed, such as stable coins. To this effect, the European Banking Authority has recently issued a report wherein it confirmed the possibility of crypto-assets which exhibit certain characteristics, to qualify as e-money thereby falling within the scope of the EMDII. In such cases, authorisation as an EMI would be required to carry out activities involving electronic money pursuant to Title II of the EMD2 unless a limited network exemption applies in accordance with Article 9 of that Directive.
This article was first published in The Malta Independent (Law Report), Wednesday, 6th March.