Electronic money, often referred to as e-money or digital currency, is a digital representation of fiat currency stored electronically. It can be used for online transactions, payments, and remittances. E-money providers are subject to regulatory oversight to prevent money laundering and ensure customer funds’ security. These regulations often require e-money providers to implement robust anti-money laundering (AML) and know-your-customer (KYC) procedures.
Key Characteristics of E-Money
Electronic money (e-money) represents a digital alternative to physical cash. It is prepaid monetary value stored on electronic devices or platforms—such as cards, mobile wallets, or apps—and is used for making payments to entities other than the issuer. Unlike virtual currencies like Bitcoin, e-money is denominated in fiat currency and issued by regulated institutions, making it a legally recognized form of payment in many jurisdictions.
Key features of e-money include:
Stored electronically (on hardware or in cloud-based systems)
Redeemable at par value (e.g., €1 of e-money = €1 cash)
Used for payment transactions with third parties
Backed by funds held in safeguarding accounts
Examples include prepaid debit cards, digital wallets like PayPal or Revolut, and mobile money systems such as M-Pesa.
Regulatory Framework
E-money is regulated under various frameworks depending on the jurisdiction. In the European Union, the Electronic Money Directive (EMD2) governs the issuance and redemption of e-money, setting out licensing requirements, consumer protections, and safeguarding obligations for e-money institutions (EMIs).
In the UK, post-Brexit regulation is administered by the Financial Conduct Authority (FCA) under the Electronic Money Regulations 2011. In the U.S., oversight is decentralized, with state-by-state licensing regimes and federal supervision through bodies like FinCEN for AML compliance.
Core regulatory requirements typically include:
Safeguarding customer funds in segregated accounts
Transparent terms for redemption and fees
AML/CTF compliance, including customer due diligence
Limits on issuance or storage without KYC in place
Reporting obligations to financial regulators
These rules ensure consumer trust while minimizing risks of misuse.
Use Cases and Benefits
E-money is widely used for a variety of purposes, particularly in sectors where speed, convenience, and digital-first experiences are critical. Common use cases include:
Everyday payments: Topping up mobile phones, shopping online, or paying for subscriptions
Remittances: Sending money across borders quickly, often with lower fees than banks
Travel and expenses: Prepaid cards that allow secure foreign transactions
Government disbursements: Distributing subsidies or relief payments in a traceable, efficient manner
Financial inclusion: Providing access to payment systems for unbanked populations, particularly in developing countries
For businesses, e-money reduces the costs associated with cash handling and card processing, while offering customers a frictionless digital experience.
Risks and Compliance Considerations
Despite its advantages, e-money poses specific challenges related to financial crime and regulatory compliance. The ease of issuance, speed of transactions, and cross-border functionality make it an attractive tool for criminals when controls are weak.
Risks include:
Use of anonymous prepaid cards for money laundering
Structuring of transactions to avoid reporting thresholds
Fraudulent onboarding of users or misuse of identity documents
Exploitation of mobile money systems in jurisdictions with low regulatory oversight
To address these risks, regulators require e-money providers to implement:
Know Your Customer (KYC) procedures, especially for higher limits or redemptions
Transaction monitoring systems that detect anomalies and suspicious activity
Sanctions and PEP screening to prevent payments to prohibited entities
Strong customer authentication (SCA) to prevent account takeover or fraud
Institutions must also be prepared to report suspicious transactions to local Financial Intelligence Units (FIUs) and maintain audit trails for regulatory inspections.
E-Money vs. Cryptocurrencies and CBDCs
It’s important to distinguish e-money from other digital payment forms:
Cryptocurrencies like Bitcoin or Ethereum are decentralized and not issued by a central or regulated entity. They may be volatile and are not considered legal tender.
Central Bank Digital Currencies (CBDCs) are state-backed digital versions of fiat currency, still under development in many countries, and would function more like digital cash.
E-money, in contrast, operates in a regulated, centralized framework, offering greater legal certainty and consumer protection while leveraging digital convenience.
Outlook and Innovation
As digital payments continue to grow, e-money is expected to remain a key part of the financial ecosystem. Innovations include:
Integration with contactless and biometric authentication
API-based payment systems enabling instant merchant settlements
Multi-currency wallets for global usage
E-money as a bridge between traditional banking and DeFi platforms
Regulators are also working to harmonize rules across borders to better manage cross-border risks and promote innovation in a secure, compliant environment.
