Introduction

This document is prepared for a wide range of people interested in the arrangement and conduct of activities to provide payment services, issuance of electronic money and transactions with cryptocurrency in different jurisdictions with a relevant legal and regulatory framework.

The purpose of this paper is to briefly acquaint the readers with the most important information on the issues listed above, including:

  • Jurisdictions with comprehensive legal regulation of payment services;
  • Regulated activities;
  • Existing law and other regulations in payment services, circulation of electronic money and cryptocurrency;
  • Regulatory authorities;
  • Organizational issues of companies registration and licensing of activities;
  • Reporting and taxation;
  • Fulfillment of requirements in combating the legalization of income from illegal activities.
  • The document contains no professional legal advice and is an informational brochure only. All the given numerical values, including capital requirements, state duties, tax rates, etc., are valid as of the time of preparation of these materials.

    Jurisdictions

    Jurisdictions suitable for arrangement of business in provision of payment services and electronic money issue can be divided into the following categories:

  • Recognized Global Financial Centers;
  • Countries actively developing payment services industry;
  • Offshore Financial Centers, and
  • Others
  • The recognized Global Financial Centers with comprehensive laws regulating payment institutions and e-money issuers include, in particular:

  • UK;
  • Hong Kong;
  • Singapore and some others
  • Switzerland can be reasonably added to this list as well, but this jurisdiction is characterized by the absence of a special legal framework regulating payment services and electronic money issue. The only legal act directly related to payment services provided by non-bank institutions is the Act on combating the legalization of income from illegal activities. Beyond complying with the AML standards, non-banks are free to provide payment services without the need to comply with any other regulatory requirement except for certain restrictions such as on the maximum amount stored in accounts offered by non-bank prepaid services providers.

    There are a number of countries, in particular, countries in Southern and Eastern Europe, which are actively developing their payment services industry on the basis of detailed legislation of the European Union, namely:

  • Malta;
  • Cyprus;
  • Czech Republic;
  • Estonia
  • The traditional offshore jurisdictions with an appropriate legislative framework include:

  • Antigua and Barbuda
  • Anguilla
  • The Bahamas
  • Belize
  • British Virgin Islands
  • The Cayman Islands
  • Gibraltar
  • The Isle of Man
  • St Kitts and Nevis
  • Other jurisdictions can include jurisdictions having relevant legislation with different degrees of elaboration, but which are not popular for various reasons, such as Latvia, Thailand, Kenya, Tanzania, Uganda, Rwanda, Burundi, and others.
  • Regulated activities

    Before we list the main types of regulated activities, it is reasonable to define its subjects.

    In general, payment institutions and institutions issuing electronic money can be defined as non-banks that provide services for making payments in relatively small amounts, yet their main activity is not related to raising funds of the population through deposits and credits on the account of the funds attracted in such manner.

    Relevant legislation of each jurisdiction has its own list of activities subject to regulation. In general, the legislation on payment institutions and e-money issuers covers activities associated with the most common payment instruments, namely:

  • Credit and debit cards;
  • Cashless transfers;
  • Payment requirements (direct debit);
  • Checks;
  • Transfers without opening an account;
  • Electronic money.
  • In particular, the Directive of the European Parliament and the European Council 2007/64/EC concerning payment services defines regulated activities and activities of payment institutions, which are not subject to its provisions.

    Thus, according to Directive 2007/64/EC, payment services include:

  • Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account (an account held in the name of one or more payment service users which is used for the execution of payment transactions)
  • Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account
  • Execution of payment transactions, including transfers of funds on a payment account with the user's payment service provider or with another payment service provider:
  • execution of direct debits, including one-off direct debits;
  • execution of payment transactions through a payment card or a similar device;
  • execution of credit transfers, including standing orders
  • Execution of payment transactions where the funds are covered by a credit line for a payment service user:
  • execution of direct debits, including one-off direct debits,
  • execution of payment transactions through a payment card or a similar device,
  • execution of credit transfers, including standing orders
  • Issuing and/or acquiring of payment instruments;
  • Money remittance;
  • Execution of payment transactions where the consent of the payer to execute a payment transaction is given by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting only as an intermediary between the payment service user and the supplier of the goods and services.
  • Activities that are not covered by Directive 2007/64/EC include, among others:

  • Payment transactions consisting of the non-professional cash collection and delivery within the framework of a nonprofit or charitable activity;
  • Money exchange business, that is to say, cash-to-cash operations, where the funds are not held on a payment account;
  • Services based on instruments that can be used to acquire goods or services only in the premises used by the issuer or under a commercial agreement with the issuer either within a limited network of service providers or for a limited range of goods or services;
  • Payment transactions carried out between payment service providers, their agents or branches for their own account;
  • Payment transactions between a parent undertaking and its subsidiary or between subsidiaries of the same parent undertaking, without any intermediary intervention by a payment service provider other than an undertaking belonging to the same group
  • At the same time, the Law of the Cayman Islands concerning services related to money circulation dated 2010, lists the following regulated services:

  • money transmission;
  • cheque cashing;
  • currency exchange;
  • the issuance, sale or redemption of money orders or traveller’s cheques; and
  • such other services as the Governor in Cabinet may specify by notice published in the Gazette
  • The Decree on Regulated Activities of 2011, as amended in 2013, which was issued in the development of the Isle of Man Financial Services Act of 2008, applies to the following services related to the transfer of funds:

  • Operation of a bureau de change.
  • Provision and execution of payment services directly.
  • Provision and execution of payment services as agent.
  • Provision of cheque cashing services.
  • Issue of electronic money.
  • Hereinafter, the regulated activities will be specified in the relevant sections of a particular jurisdiction.

    International regulation of payment institutions, electronic money issuers and cryptocurrency operators

    Payment services and electronic money issuers

    Legislation, which should be studied in order to arrange payment business, can be conventionally classified as follows:

  • Laws and other regulations governing, in particular, registration of companies, requirements to founders, directors, capital, accounting and reporting, auditing, disclosure, etc.(Company Law Directive 2009/101 / EC, Malta's Companies Act 1995, The Isle of Man Companies Act 2006, etc.);
  • Laws and other regulations governing the taxation of legal entities (UK's Corporation Tax Act 2010, Malta's Income Tax Act, etc.);
  • Laws and other regulations directly governing payment institutions and activities in the provision of payment services, such as laws/regulations/directives on payment services/transfer of funds (Payment Services Directive 2007/64/EC, The Cayman Islands Money Services Law, 2010, etc.);
  • Laws and other regulations on combating the legalization of income from illegal activities (3rd Anti-Money Laundering Directive 2005/60/EC, UK's Money Laundering Regulations 2007, BVI's Proceeds of Criminal Conduct Act, 1997 and Anti-money Laundering and Terrorist Financing Code of Practice, 2008, etc.);
  • Laws and other regulations governing certain types of transactions such as wire transfers by payment orders/requirements, cross-border payments, etc. (Regulation (EU) No 260/2012 (the SEPA Regulation), Regulation (EC) No 2560/2001 on cross-border payments in euro, Regulation (EU) 2015/751 on interchange fees for card-based payment transactions, etc.);
  • Laws and other regulations ensuring information security and preventing theft of funds
  • Laws protecting the rights of consumers.
  • Virtual alternative currencies (cryptocurrency)

    A special case in the international regulation of electronic money is currently represented by cryptocurrency or virtual alternative means of payment such as Bitcoin.

    Government regulation has for a long time been a grey area for Bitcoin, both in the United States and elsewhere. Although there have been a number of disparate government reports either simply talking about Bitcoin or providing a regulatory opinion on some aspect of Bitcoin exchange, to date we have not seen anything close to a conclusive statement on digital currencies from any government organization in any country in the world.

    The problem is a difficult one; nearly all laws to date that attempted to regulate online payments of any form have all assumed a central issuer, and in the case of Bitcoin it could be just as easily argued that everyone is an issuer or that no one is.

    The US government has moved to clarify its regulatory stance on virtual currencies such as bitcoin, confirming that while users are not classified as money services businesses (MSBs) subject to its rules, exchanges and administrators are.

    The guidance notice issued on 19 March 2013 by the Treasury's Financial Crimes Enforcement Network (FinCEN) distinguishes different types of electronic money, namely:

  • E-currencies and e-precious metals;
  • Centralized virtual currencies, i.e. a convertible virtual currency that has a centralized repository;
  • Decentralised virtual currencies, i.e. a decentralised convertible virtual currency that has no central repository and no single administrator, and that persons may obtain by their own computing or manufacturing effort
  • and the main actors:

  • Users;
  • Exchangers and
  • Administrators
  • In the guidance notice, the Treasury's Financial Crimes Enforcement Network (FinCEN) confirms that users of bitcoins, Amazon Coins and other virtual currencies, i.e. those “who use virtual currencies to buy and sell goods and services”, are not MSBs under the Bank Secrecy Act and so do not fall under registration, reporting, and recordkeeping regulations.

    However, exchangers - those "engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency" - and administrators - those "engaged as a business in issuing (putting into circulation) a virtual currency" - are considered MSBs and have to be licensed.

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