The Electronic Money Institutions Act entered into force on 1 January 2006. For the first time in the Estonian legal system there is now a law that provides a legal bases for electronic money institution operations, including the conditions of electronic money issue and supervision over the operations of electronic money institutions.
This constitutes direct transposition of the European Union acquis, since this Act harmonises the European Parliament and Council directives 2000/46/EC on electronic money institutions and 2000/28/EC relating to the pursuit of the business of credit institutions. The Act also adds to the provisions under the Law of Obligations that regulate the use of electronic payment instruments.
There are two general types of electronic money services:
- Card-based electronic money services. The card-based electronic money services are used as electronic payment instruments to effect small scale payments in the place of paper money and coins (e.g. bus tickets, parking fees);
- Software-based electronic money services. In the case of the software-based electronic money services (so-called digital money) the relevant telecommunications (e.g. the Internet, mobile communication) are used for effecting payments in the place of debit and credit payments. When a customer exchanges either cash or account money into electronic money then he or she trusts his or her money to the issuer of electronic money (like deposit of funds in a credit institution). Thus, the issuer of electronic money must ensure that the customer can effect payments with the electronic money and exchange the electronic money back into cash or account money, if needed.
The electronic money is, in essence, an electronically "recorded" value, which means that it is a prepaid instrument where the electronic money is recorded on for instance a card chip and upon card payments the amount of money saved on the card starts to decrease back to zero. Thus, the main difference between electronic money and cheques, direct debit orders, debit and credit cards, is the absence of a direct link to the payer’s bank account or credit limit. A significant additional feature of electronic money is that in addition to the issuing institution or the credit institution (who may also act as the issuer of electronic money) the undertaking who has a direct credit relationship regarding the use of electronic money as a payment instrument with the customer of the electronic money institution has to also accept it as a payment instrument.
An institution issuing electronic money is legally an entirely new form of a financing institution (a public limited company, whose main and permanent business constitutes issuing of electronic money) to facilitate the provision of electronic money services in Estonia and other EU Member States and the same for foreign entrepreneurs in Estonia. As the provision of that service entails considerable operative and financial risks, then the necessary legal framework is provided by law, incl. the obligations to apply for a licence from the Financial Supervision Authority and to follow the prudential requirements, in order to ensure sensible and trustworthy operation by the relevant financing institutions. The general aim of the prudential requirements for the electronic money institutions is to cover the risks deriving from the electronic money institution business with its own funds. Therefore, similarly to credit institutions, investment companies, insurers and management companies, electronic money institutions also have the requirement of minimum share capital and own funds (1 million Euros) and investment restrictions. Similarly to other legal acts that regulate activities of market participants, additional obligations are also provided by this Act on the management bodies of the electronic money institutions and shareholders who have significant information.
According to data available from the website of the Estonian Financial Supervision Authority (www.fi.ee), there are no local electronic money institutions established so far, but two UK origin elektronic money institutions Neteller and PayPal (Europe) Limited have given notice of an intention to offer cross-border services in Estonia.
It has actually been discussed whether certain mobile communication services, like the m-parking, can be categorised under electronic money or not. Since the customer has in that case no direct link to the service provider, and the service provider itself does not accept the SMS sent by the customer as a payment instrument, then this service is not classified under electronic money. In today’s world of new technologies and rapid development of e-services it cannot be excluded that local electronic money institutions will also be established in the near future. The proportion of electronic money in relation to the money in circulation in the European Union has nevertheless been marginal at about 0.08%, its development and use is at the same time considered to have great potential in the future.
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