A. The Structure of an E-Money Transaction

Mobile money involves the transfer of e-money through mobile phones. E-money is typically defined as stored monetary value which is represented by a claim on the issuer and issued on receipt of funds for the purpose of making payment transactions and accepted by a person other than the issuer.Footnote ¹⁴

Different countries have developed different e-money business models, largely dependent on the type of entities providing the e-money service (‘Providers’). Different business models can be classified depending on the level of involvement of banks and non-bank institutions.

Figure 1:

Bank-based versus non-bank-based modelsFootnote ¹⁵

In a bank-based model, customers have a direct contractual relationship with a bank, or with a non-bank agent contracting on behalf of a bank.Footnote ¹⁶ In some of these cases the services have been characterized as bank deposits, subject to deposit guarantee,Footnote ¹⁷ and restricted to institutions with a banking license.Footnote ¹⁸

In non-bank-based models, customers do not have a direct relationship with a bank, and thus do not need a bank account to make financial transactions.Footnote ¹⁹ In several developing countries, MNOs have become important non-bank Providers of e-money services.Footnote ²⁰ Users buy a SIM card with the mobile money application for their phone, which has an electronic account associated to it. The non-bank Provider issues electronic value that customers purchase with legal tender, which the Provider will often store in a bank account. Customers can use this mechanism to deposit money into (‘cash in’) or withdraw money from (‘cash out’) their account. They will normally do so through specific access points such as agents of the Provider or Automated Teller Machines (ATMs). They can also use their mobile phone applications to send money to or receive money from other service users. The aggregate balance in each user's account is referred to as the ‘customers’ funds’.Footnote ²¹ The model is depicted in the diagram below.

Figure 2:

Basic mobile e-money modelFootnote ²²

Given the limited scope of banks in developing countries, particularly in rural areas, the provision of e-money services by non-bank institutions has great potential for fostering financial inclusion. However, it also brings legal challenges for the protection of customers’ funds: in these cases, e-money will normally be characterized as a sui generis financial product and thus will not be covered by protection mechanisms applicable to more traditional financial products such as deposit insurance. This paper explores how civil law jurisdictions can address these challenges.

B. Risks to Customers’ Funds, and Legal ‘Functions’: How the Common Law Fulfils the Functions and What the Challenges Are for Civil Law Systems

There are three main risks to customer funds that occur as a result of the transaction structure outlined above. These risks determine the functional characteristics required for any legal solution to be effective.

First, if the e-money Provider or bank where the Provider holds its customers’ funds becomes insolvent, customers bear the risk of not being able to recover their funds (‘insolvency risk’). The funds may be used to repay privileged creditors, or distributed pari passu among ordinary creditors of the insolvent institution. Any legal mechanism aiming to protect customers’ funds from insolvency must therefore fulfil the function of ‘fund isolation’.Footnote ²³ This type of protection raises three issues:

• • whether the legal mechanism employed has the effect of segregating customers’ assets from the assets of the Provider if the latter becomes insolvent;

• • if the assets backing the customers’ accounts are held in a financial institution, whether those assets will be protected from the insolvency of the institution;Footnote ²⁴

• • whether customers will have preferential rights over separate assets, or pro rata rights over a single asset pool (segregated from the Provider's and the bank's assets).

Second, customers may not be able to cash out their e-money accounts upon request (‘liquidity risk’), if the ratio between e-money issued and customers’ funds is greater than 1:1. Regulation should thus safeguard customers’ funds by constraining the Provider from using those funds for its own purposes. This function is closely connected to fund isolation.

Third, customers’ funds may be lost due to ‘operational risks’ such as fraud, theft, misuse, negligence or poor administration.Footnote ²⁵

The response to these risks in common law countries is closely associated with the legal institution of the trust. Two of us have proposed that a trust relationship could protect e-money customers against these risks: the Provider could act as trustee of the customers’ funds (ie trust assets) for the benefit of the customers (ie ‘beneficiaries’).

Figure 3:

The application of a common law trust to e-moneyFootnote ²⁶

The features of the trust fit the mobile money industry well.Footnote ²⁷ A trust can fulfil the previous functions, and protect against (at least some of) the customers’ risks in holding e-money. First, a trust isolates customers’ funds from other assets held by the Provider. Typically, the Provider is the legal owner of the customers’ funds because these are kept in one or more accounts in the name of the Provider, not the customers’.Footnote ²⁸ However, the assets are held in a separate account where customers are the beneficiaries.Footnote ²⁹ Isolation from the financial institution's insolvency, and segregation of customer accounts, may be a more complex issue, and will depend on whether the Provider accounts are also trust accounts.

Second, trust law can safeguard customers’ funds from liquidity risk. Trustee duties can either be explicit (in the contract) or implied (by law)Footnote ³⁰ and may require the provider/trustee to maintain a 1:1 ratio between e-money and funds on deposit in the trust account; invest customers’ funds in liquid assets; diversify its portfolio; and prevent it from using customer funds for its own purposes.Footnote ³¹

Third, trusts can be used to minimize operational risk in two ways. The trust deed can require the Provider to have the trust accounts audited regularly; and can provide for a third party (typically the relevant regulator) to serve as the Protector and monitor the Provider's compliance with its duties as trustee as customers may not have the capacity to monitor the trustee themselves.Footnote ³²

Table 1.

Functions for the protection of mobile money customers

Civil law countries raise more difficult issues, as there is no ‘civil law trust’. The most obvious reason for this is that the trust originated as a device to separate a specific asset, or group of assets, from the assets of the fiduciary, while facilitating the management of those assets by that fiduciary. Thus, trusts blur the line between bilateral obligations and property rights in a very ‘un-civilian way’.Footnote ³³

Such incompatibility is far from widely accepted, however.Footnote ³⁴ Legal structures such as the fiducie in France and the fideicomiso in Latin American jurisdictions have often been regarded as the civil law equivalent of, or at least as bearing a close resemblance to, common law trusts.Footnote ³⁵ Furthermore, trusts set up in common law countries can be subject to recognition by means of the Hague Convention of 1985 on the Law Applicable to Trusts and on their Recognition (‘the Hague Trusts Convention’), although very few states have ratified the Convention.Footnote ³⁶

The second, and less obvious, reason is that the Anglo-Saxon trust has evolved over centuries and its contours and tenets are well established and readily enforced across common law jurisdictions. The legal term ‘trust’ is easily recognizable, and associated with a series of rights and safeguards which are common across common law jurisdictions. This degree of consistency cannot be taken for granted for all private law institutions in civil law countries.

Thus, the quest is not for an equivalent of the trust, but for an institution, or combination of institutions, which can serve customers’ needs in the specific context of e-money, be sufficiently recognizable to be readily enforceable, and provide adequate rules to accommodate evolving situations. We now proceed to explain the relevance of such ‘recognizability’ and rules.

C. The Problem in Legal Terms: Default Rules and Mandatory Rules

This subsection examines two types of legal rules that fulfil the above functions required to limit the risks to e-money customers: ‘mandatory rules’ and ‘default rules’. Both common law and civil law jurisdictions recognize freedom of contract and pacta sunt servanda (ie that the terms agreed upon in a contract will be enforced by the courts). However, there are instances where the solution enforced by the courts may be ‘contrary to’, or ‘outside’ what the parties have agreed. Solutions ‘contrary to’ the agreement are contained in mandatory rules, and solutions ‘outside’ what the parties have agreed are contained in default rules.Footnote ³⁷

The rationale for mandatory rules is difficult to apply in each case, but easy to explain. A strict enforcement of the terms of the contract in full presumes that (a) the parties are rational, (b) that they are fully informed, and (c) that all parties whose interests are at stake are involved. Regarding (a) and (b), mobile money customers may lack financial experience or financial education. Fully enforcing the terms of the contract could thus lead to results that are inefficient, in terms of resource allocation, or be seen as unfair.

The rationale for default rules is subtler, yet even more important, as even very sophisticated Providers cannot foresee all possible contingencies. Courts will enforce contract terms as a ‘plan A’, but default rules act as a ‘plan B’, in case a contingency arises that is not covered by the contract.

Civil law courts first try to ascertain the contract's ‘meaning’ or the parties’ ‘wishes’,Footnote ³⁸ but at times are required to resort to default rules. To select the most suitable default rules civil law judges try to subsume the facts into one of the existing categories of legal transactions, by asking the following kind of question:

Judges will have to choose between rules for fiduciary transactions, mandates, deposits or loans as default rules, which may result in different degrees of protection depending on the chosen institution.

The process followed by a civil law judge is summarized in the following decision tree:

Bearing this in mind, a Provider could simply steer clear of mandatory rules, and try to draft the contract in terms that not only stipulate the explicit solutions to specific problems, but also broader, background rules, to cover unexpected contingencies. However, this decision tree does not sufficiently take into account two important factors.

First, it does not acknowledge that it is a judge who decides whether there is a clear solution in the contract, or whether the contract can be interpreted to provide such a solution. A judge is not a contracting party, nor ‘neutral’ about her preferences between ‘contract solutions’ and ‘legal solutions’. In case of conflicting interpretations of the contract the judge may be tempted to hold that the contract was not clear enough to derogate from the legal rules she knows.Footnote ⁴⁰

Second, in civil law countries this tendency to resort to the default rules of existing institutions is often reinforced by the doctrine of the causa. Causa resembles common law consideration but has further implications and, under some views, requires a judgment of correspondence or adequacy between the socio-economic function of the contract, and the socio-economic function of one of the contract ‘types’ (deposit, mandate or loan).Footnote ⁴¹ In the absence of a contractual provision, courts will tend to use the rules of the institution relied upon by the parties, as default rules.

In exercising in personam jurisdiction resulting from the Provider–customer agreement, this exercise may simply result in a more obstinate reliance by courts on legal institutions, rather than contract terms. However, in relation to fund isolation, the available structures of rights in rem under a civil code may result in the invalidity of the customer's claim over the funds, since, for rights in rem the doctrine of numerus clausus prevails.Footnote ⁴²

If the structure of rights envisaged in the contract and those envisaged in one of the legal institutions contemplated in the civil codes do not correspond, it can create friction between the law and the goals of the contract (at best), or render the customer's rights over the funds ineffective against Provider's creditors (at worst). It is therefore critical to analyse the structure of rights in the existing figures contemplated under the civil codes. That is the purpose of Section III.

A. Proprietary Alternatives: The Fiduciary Transaction

1. Basic transaction

Perhaps the legal instrument that bears the closest resemblance to the trust in a civil law jurisdiction is the fiducia.Footnote ⁴³ The fiducia encompasses a wide array of applications. Some jurisdictions regulate fiducia expressly; others only recognize it but do not have express legal provisions to regulate it; while some jurisdictions do not recognize it at all. Moreover, where the fiducia is recognized, it may be referred to by different names; and, even among those using the same name, its legal structure and effects may vary across jurisdictions.Footnote ⁴⁴ It may be recognized as a product of the parties’ free willFootnote ⁴⁵ or may arise by operation of the law.Footnote ⁴⁶ The formalities required for its constitution may be more or less stringent. It may be limited to commercial transactions, or it may cover a broader range of situations, including successions, tax and charitable purposes.Footnote ⁴⁷ Some jurisdictions may also impose restrictions on who has capacity to act as fiduciary.Footnote ⁴⁸

This paper focuses on applications of fiducia that are achieved by an inter vivos deed. We will refer to them as ‘fiduciary transactions’. A fiduciary transaction can be broadly defined as an arrangement under which one party—the settlor—conveys property to another—the fiduciary—and the latter agrees to use that property for a specific purpose. The fiduciary agrees to transfer the fiduciary assets to one or more beneficiaries upon fulfilment of the agreed purpose.Footnote ⁴⁹ When using the fiduciary assets, the fiduciary will be subject to a series of duties agreed upon with the settlor or determined by law.

Generally, fiduciary contracts fulfil two purposes: a) the administration of the fiduciary assets by the fiduciary; and b) the provision of security for one or more obligations of the settlor. The use of fiduciary contracts in the context of e-money services would normally fall within the first category. Typically, in order to guarantee that customers will be able to recover their funds, the Provider will settle a fiduciary contract by transferring the funds to a fiduciary institution that will hold the assets for the benefit of the customers (ie the beneficiaries).Footnote ⁵⁰Figure 4 depicts this situation.

Figure 4:

Fiduciary transactions in the context of e-money (I)

In some jurisdictions, customers will transfer the funds to the Provider under a fiduciary contract, which holds the Provider as a fiduciary.Footnote ⁵¹ If the Provider does not have the necessary infrastructure to assume safeguarding duties it will normally deposit the customers’ assets with a financial institution, which may not have fiduciary duties under the law. This potentially undermines the protection of customers’ funds. Figure 5 depicts this situation.

Figure 5:

Fiduciary transactions in the context of e-money (II)

Alternatively, the Provider could be considered the beneficiary, and the bank the fiduciary. In order to protect the customers’ interest in the funds the customers and the Provider could enter into a second fiduciary contract, where the Provider would be the fiduciary, and customers the beneficiaries.

B. Contractual/Obligational Alternatives: The Mandate Contract

Under a mandate contract, one party (the agent) commits to act on behalf of another (the principal) for a fee, unless otherwise specified.Footnote ⁸⁵ The agent is liable to fulfil the mission mandated by the principal in the capacity and under the circumstances specified in the contract. The mandate contract provides a basic foundation for other, more complex, legal mechanisms such as deposit and loan contracts, as well as fiduciary mechanisms.

In the context of e-money services, the mandate contract cannot be used as the sole institution to regulate the relationship between the customer and the Provider. By purchasing e-money from the Provider, the customer relinquishes proprietary rights over the funds in exchange for the right to dispose of the e-money. The customer would thus not have the legal capacity to mandate the Provider to dispose of funds that she no longer owns.

Nevertheless, the mandate contract could regulate the relationship between the Provider and a bank. The Provider could mandate the bank to keep custody of the customers’ funds in accordance with a series of duties specified in the contract. Like the fiduciary under the fiduciary contract, the agent would be bound by the duties specified by the parties in the contract or the enhanced good faith duties provided by law. Such quasi-fiduciary responsibility vis-à-vis the principal could potentially provide e-money customers protection against liquidity and operational risk. The mandate contract, however, would not provide protection against the risk of the Provider or the bank becoming insolvent. The segregation of those assets would require an express legal mandate or the creation of a separate patrimony from that of the Provider or the bank. These are, precisely, the characteristics of the fiduciary contract. If the agent became insolvent, the assets would not fall into the agent's insolvent estate because they never left the principal's patrimony.Footnote ⁸⁶

The mandate contract cannot, per se, effectively protect e-money customers against the risk of the Provider's insolvency. However, as a legal mechanism de minimis, mandate contracts provide an important body of default rules that regulate the duties of the Provider towards the customer, arising from the statutory duties of an agent to act in the interest of the principal,Footnote ⁸⁷ and to exercise due care and skill.Footnote ⁸⁸

Under certain circumstances, fiduciary contracts can effectively isolate customers’ funds in the event of the Provider's insolvency, as well as provide customers with protection against insolvency risks, protection against certain operational risks, and the flexibility to introduce extra duties. Their main handicap is their lack of general background rules regulating the duties of the fiduciary towards the customer. This is the gap that other private law arrangements, such as the mandate contract, are able to fill. Interestingly, some countries that have defined fiduciary transactions by focusing on the relationship of the parties with each other rather than on the assets have done so by using the mandate and commission contracts as a model.Footnote ⁸⁹ This approach could be the blueprint for mobile e-money transactions.

To hold that the mandate's shortcomings can be corrected by means of better contractual clauses would be wrong for two reasons. First, a contract cannot predetermine the protection of a right upon insolvency unless the right created by the contract belongs to one of the categories that enjoy insolvency protection.Footnote ⁹⁰ Second, courts confronted with a difficult case of fund isolation (eg upon the Provider's or the bank's insolvency) would lack background principles with which to determine whether customers’ funds have been properly ring-fenced.Footnote ⁹¹ Consequently, a mandate contract would not be suitable on its own to regulate e-money services;Footnote ⁹² at best, it could provide the basis for the Provider's duties vis-à-vis its customers, but not for the rights over the funds.

C. Regulatory Alternatives: Regulating Functional Duties Directly and/or Requiring Insurance

The mechanisms and their respective drawbacks described above reveal the difficulty of providing a single solution for the effective protection of e-money customers’ funds in civil law jurisdictions. In light of this difficulty, policymakers have two alternatives. First, the functions outlined above could be regulated directly, eg under an e-money statute or regulation. Second, in the absence of such direct regulation, regulation could protect customers’ funds indirectly by, for instance, requiring insurance.

2. Insurance

Regulators could also require the insurance of e-money customers’ funds against any of the risks identified in Section IIB. This is an approach also adopted in the European Union for payment services.Footnote ⁹⁶

The requirement to insure customers’ funds could be legislated to strengthen the protection that existing legal instruments would provide to customers’ funds, or to protect customers’ funds where no legal instrument in the relevant jurisdiction fulfils the functions identified in Section IIIA. Regulators would have to decide whether insurance would be provided by the market or by public institutions.

Although an insurance policy, either as a complementary or a stand-alone mechanism, would ensure effective protection to e-money customers’ funds, there are important issues to consider.

First, the e-money market conditions may not be ideal for the viability of an insurance scheme, for example, where the number of potential e-money customers is small.Footnote ⁹⁷

Second, one could expect Providers to pass on the cost of mandatory insurance to customers. This could have a serious impact on the demand for e-money services and on its potential as a tool for financial inclusion. One should expect the cost of insurance covering all the risks described in Section IIB to be higher than insurance used as a complementary mechanism to compensate for specific deficiencies.

Third, in the event of the Provider's insolvency, insurers may refuse to compensate customers until the end of the insolvency proceedings, which may impose hardship on impecunious e-money customers. Additionally, given the lack of sophistication of many e-money customers it will be important to ensure easy access to financial compensation.

Fourth, insurance may create moral hazard, as Providers would have fewer incentives to comply with the protection rules described above. Effective monitoring by the competent authorities, as described in Section II, will be essential.Footnote ⁹⁸

Fifth, insurance will only give customers a personal claim for damages against the insurance company in the event of the Provider's insolvency. This protection is not legally as strong as that provided by other mechanisms where customers remain the owners of their funds or where those funds, despite being owned by the Provider, are separated from its personal patrimony.Footnote ⁹⁹

Finally, insurance will not eliminate counterparty credit risk for e-money customers. Insurance, effectively, will substitute the risk of the Provider becoming insolvent with the risk of the insurer becoming insolvent. Any insurance scheme should rely on financially robust insurance companies or ensure sufficient public funds to cover the potential losses of customers. Where the insurance industry is not very strong or where the government may be in a situation of financial hardship, access to compensation must be made available through other means.

Table 2 provides a summary of our findings in relation to the different legal mechanisms available to regulators in civil law countries to protect e-money customers’ funds.

Table 2.

The protection of e-money customers’ funds under civil law

The table shows there is no single mechanism that will effectively protect e-money customers against the three risks identified in Section IIB; so we anticipate any regulatory strategy to include a combination of different legal mechanisms. In this context, the interaction of the rules applicable to such mechanisms will be crucial to provide effective protection. We turn to all these questions now.

A. Summary of the Options Available to Regulators

1. Fund isolation

The first priority for policymakers should be to guarantee the isolation of customers’ funds. Policy strategies will vary depending on whether fiduciary contracts are recognized in the relevant jurisdiction and on the treatment given to fiduciary assets receiving such recognition.

Where fiduciary contracts are recognized in the relevant jurisdiction and fiduciary assets are separated from the personal patrimony of the fiduciary, Providers should rely on fiduciary contracts to protect customers’ funds. Lawmakers could include statutory requirements for those Providers to hold customers' assets under a fiduciary contract (or including it as a preferred model to safeguard customers’ funds). Several civil law jurisdictions have implemented this regulatory strategy, often within the broader framework of e-money regulation.Footnote ¹⁰⁰

In jurisdictions where fiduciary contracts are recognized but the separation of assets from the fiduciary's personal patrimony is unclear, it will be important for regulators to clarify customers’ protection against the risk of the fiduciary's insolvency. Direct regulation could be of general reach (for all fiduciary contracts) or narrower in scope (eg only affecting fiduciary contracts for e-money accounts). Alternatively, in countries where private law arrangements are difficult to amend without upsetting the whole civil code system this could be done by introducing specific provisions in the relevant insolvency laws, which would give e-money customers a right to segregate their assets from those of the insolvent estate.Footnote ¹⁰¹ Yet another possibility would be to introduce ring-fencing requirements to require Providers, for example, to carry on their e-money business through a separate legal entity, which would hold the latter's funds under a fiduciary contract.Footnote ¹⁰² Regulators could also require Providers to subscribe to an insurance policy to cover the risks for customers’ funds. This alternative could be complementary to the fund isolation strategies outlined above, or be enacted as a stand-alone option.

Where fiduciary contracts are not recognized, there are limitations on the necessary protective mechanisms private parties can create to make e-money work. In such a context, legislation could be passed that expressly contemplates e-money as a new type of admissible private law arrangement, without making a broader statement about the admissibility of fiduciary transactions as a whole.Footnote ¹⁰³ Such legislation could also rely on the enhanced good faith duties of mandate, but should introduce specific fund isolation protection in case of insolvency.

However, there may be reasons why the protection of e-money customers’ funds may not justify a full reform of the relevant legal system.Footnote ¹⁰⁴ In such cases, those countries cannot entirely rely on an institution like the mandate, because it presumes, rather than regulates, the separation of funds between principal and agent. The patrimonial relation would normally be seen as a loan or a deposit. This would create some friction, due to the lack of background rules on segregation of assets by the borrower (Provider) under the loan, and the lack of background rules that authorize the depositary (Provider) to dispose of the assets under the deposit.

The following table provides a summary of the options available to legislatures for the protection of customers’ funds against the risk of the fiduciary becoming insolvent:

Table 3.

A summary of policy options to achieve fund isolation

B. How Can Legislatures Grant Protection while Fostering Competition between Different E-money Models and Ensuring Cross-border Compatibility?

If the main problem of private law background rules is their lack of certainty (as they are designed for a wide variety of cases) the problem of regulatory rules is their lack of flexibility. Thus, it is important for policymakers to consider the trade-offs between certainty and rigidity, an analysis that is particularly useful when comparing regulatory solutions with private law solutions, but which can also be applied to evaluating the different private law solutions.

Let us begin with regulatory solutions. Regulatory rules are typically mandatory, and their scope of application is normally accompanied by a ‘reserve of activity’ clause, meaning that the provisions under the specific act will be applicable only to the entities expressly authorized to provide the regulated service.Footnote ¹¹⁰

This requires active engagement by the financial supervisor, which must be up to the task. This is particularly important considering that, in many cases, the zeal by which supervisors control compliance ex ante (ie before granting the authorization) is greater than that exercised when controlling compliance ex post (ie fulfilment of segregation, safeguarding and management duties).

If the supervisor appointed is the central bank, or a similar banking supervisor, the system is most likely to be bank-biased. In particular, the procedures for authorization will tend to mirror the characteristics required for the authorization of financial institutions, which will enjoy an advantage in terms of experience with compliance procedures, and, in many cases, access to the supervisor.

Even assuming that the supervisor runs the ex ante authorization without any bias, it is unclear how it would apply conduct rules ex post. Regulatory rules are considered public law rules for enforcement purposes. This means that, unlike private law rules, their breach entails public enforcement action, which curtails the possibility of constructing rules that regulate the parties’ duties flexibly, or imply duties not expressly contemplated in the law.

In addition to enforcement action by supervisors there is also the possibility that the rules are interpreted by civil courts. However, the more specific and self-contained the regulatory rules are, the more difficult it will be for the judge to draw an analogy with the broader laws of ‘fiduciary transactions’ or ‘mandate contracts’. Regulatory rules provide a more certain answer to the contingencies envisaged in those rules, but may leave great uncertainty in the face of unforeseen contingencies.

Furthermore, some rules may actually require classification of the relationship pursuant to private law rules. Insolvency rules, which are the flip side of segregation rules under property rights, normally require that the right of the parties (in this case, the customers) belongs to one of the categories of property/security rights, or, generically, in rem rights to dispense enhanced protection upon the insolvency of the Provider. Absent a smooth connection between regulatory rules and private law rules the insolvency court may well conclude that, although the parties’ arrangement was regulated by financial provisions, it did not fulfil the requirements under private law to be granted segregation protection.Footnote ¹¹¹

A country could, of course, introduce safe-harbor rules that expressly protect customer funds without specifying under what private law arrangement they are considered protected. But this would raise uncomfortable questions, if, for example, a Provider identified and ring-fenced the funds, but did not fulfil all formal requirements (under regulatory provisions or private law). In that case, should the court rely on substance, and conclude that customers deserve protection, or on formal requirements under regulatory provisions, and leave customers unprotected? Regulatory provisions do not come with clear guidance for hard cases, and introducing specific insolvency provisions without relying on existing private law categories is not a sound long-term strategy. Insolvency courts should be able to make sense of all provisions taken together, and the more exceptions that exist without clear justification, the more sophisticated the courts need to be.

A regulatory approach constitutes a fundamental step towards ascertaining the Provider/custodian duties in e-money services.Footnote ¹¹² We argue that to be really effective, such rules should be seamlessly connected with private law institutions and contract provisions. Otherwise, they will (a) fail to address new situations, thereby requiring new reforms at best, or leading to the ossification of the system at worst; and (b) introduce restrictions on competition between different e-money models. This is especially true if financial rules introduce a bank-bias, which can place the MNO-led model in a particularly precarious position.

Given this conclusion there is no reason for us to stop at regulatory provisions when analysing the ‘certainty versus rigidity’ dimension. All rules, both public and private, can be subject to the same scrutiny. Under this premise what matters is how easily the legal rules and institutions can fit together, and be used as ‘building blocks’ to give support to e-money. The issue is not qualitatively different from the interoperability of technologies: if legal rules are compatible, network effects are enhanced and the value of the network increases.

In a context of great uncertainty, it may make sense for the law to ‘standardize’ some options, especially in the initial stages, but policymakers should be aware of the costs of standardization, leave room for competition, and enhance network effects by allowing different models (based on different institutional structures) to operate with each other.

Cross-border payments, in particular, can only occur if protocols and standards (including legal standards) are compatible. Obstacles to this will exist if, for example, the rules that grant protection to customer funds require (a) the Provider to be a certain type of entity, or be authorized by the domestic regulator; (b) the Provider to employ a specific private law mechanism to safeguard funds; or (c) the Provider to have the assets subject to custody arrangements under the laws of the country.

This requires a second closer look at the use of fiduciary transactions. Many civil law countries, despite contemplating the fiducia as a private law institution, introduce the requirement that only financial institutions can be fiduciaries.Footnote ¹¹³ This makes the fiduciary approach half-regulatory, half-private law. It also means that ensuring fund isolation in e-money in those countries will be difficult unless a financial institution is enlisted into the scheme. This poses problems for the MNO-led model. If the law requires the fiduciary to be a financial institution the options are to (a) not use the fiduciary transaction, in which case the protection of funds via a deposit/loan would be precarious in case of the Provider's insolvency; or (b) rely on fiduciary transactions involving a financial institution, in which case there would be a problem with the characterization of the Provider's role. Should the provider be the beneficiary, or only the agent subscribing fiduciary contracts on behalf of customers?

In this second case, problems can arise with the compatibility of the laws of fiduciary transactions and the laws of mandate. If laws on fiduciary transactions are not flexible, and contemplate a direct fiduciary relationship between the fiduciary (the bank) and the beneficiary, and the Provider adopts the role of an agent, the protection of that Provider's position would be weak. This would impair the model of MNO-as-Provider and contribute to the ‘bankarization’ of e-money.Footnote ¹¹⁴ However, if the Provider acts as the beneficiary, customers would be protected in the event of the bank's insolvency, but not that of the Provider. Thus, restricting the role of the fiduciary to a subset of institutions is not a good idea if the goal is to promote compatibility of rules and competition. To promote safety it would be better to legislate safekeeping characteristics that the fiduciary needs to fulfil, and the contents of the duty to account.

Even if a country does not restrict the fiduciary's role to financial institutions other rigidities can exist. Patrimonial separation may make it easy to insulate the funds, but make it more difficult to grant customers rights over them.Footnote ¹¹⁵ Also, the introduction of fiduciary transactions via statutory reform is an important first step, but does not automatically create the body of principles that serve as background criteria for hard cases. If the principles underlying such rules are not completely clear, judges may search for solutions in adjacent property/security rights, such as the pledge, which may be unsuitable for mobile e-money purposes.

The issue can be even more complex in a cross-border context. Customers seeking protection of their funds in a scenario where the fiduciary is located outside their territory may need, as a prior step, the recognition of patrimonial separation by the laws of a country different from the laws of the country under which the rights were created. Some institutions, like the mandate, are flexible enough, and widespread enough, to enjoy cross-border recognition (it should not be difficult for the courts of one country to recognize a foreign entity as the agent of a customer located in their territory).

But fiduciary transactions are something new and, arguably, an exception. Thus, the question is whether, by enacting statutory provisions that regulate fiduciary transactions a jurisdiction is committed to give recognition to fiduciary transactions created under the laws of a different country, which may entail different rights and duties. A court confronted with a request for the recognition of the patrimonial separation resulting from a fiduciary transaction subject to foreign law may (a) adopt a pragmatic stance, and acknowledge every transaction that is validated as such by a registry entry or legal opinion in the foreign country; (b) rely on the nomen iuris, and recognize it if it is denominated as fiducia or something similar; or (c) subject it to a test of functional equivalence (to see if all the elements considered relevant by its domestic law are present). If the recognition is sought in a country that does not recognize fiduciary transactions under its domestic law, the problem may be even more difficult. The Hague Trusts Convention was supposed to resolve these cross-border problems but has been ratified by few States.Footnote ¹¹⁶

Thus, the suitability of fiduciary transactions should not allow us to overlook the associated rigidities. Such rigidities will be present not only in the extreme case where the Provider goes insolvent, but also in cases where the customer wants to make its e-money units ‘portable’, or usable in different countries. Fund protection should be the same across borders, and not lose strength with every degree of separation. Thus, the legal device employed needs to be carefully considered when building the ‘infrastructure’ for fund safeguarding and fund management between Providers and banks beyond the specific agreement between customers and Providers.

C. Other Variables Shaping Regulation of E-money: Supervisory Capacity and Customers’ Vulnerability

In considering strategies to implement e-money systems within their territory lawmakers should be aware of the different legal mechanisms that serve as alternatives (see Section III). They should also place those legal mechanisms within a wider regulatory context and be aware of how different rules interact to enhance certainty and to avoid hindering competition (see Section IVA). In this final subsection, we explore other variables that will shape the capacity of policymakers to regulate e-money: supervisory resources (1) and customers’ vulnerability and ability to discern between options (2).