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ICRI Working Paper
Series



Mobile wallets and virtual alternative currencies
under the EU legal framework on electronic
payments



Niels Vandezande


ICRI Working Paper
16
/2013


Interdisciplin
ary Centr
e for Law and ICT, K
U

Leuven







12
S
eptember

2013


This paper can be downloaded without charge from the ICRI website at
https://www.law.kuleuven.be/icri/

and the Social Sciences Researc
h Network electronic
library at
http://ssrn.com/link/ICRI
-
RES.html


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Mobile wallets and
virtual alternative currencies

under the EU legal framework on electronic payments


Niels Vandezande (iMinds


ICRI


KU

Leuven)


Abstract


In recent years, the number of mobile payments has risen rapidly. During that same timeframe, the
methodology of mobile payments has shifted from being mere monetary transactions executed by
means of an interconnected network environment


such as the Inte
rnet


toward highly diverse
mobile wallet
ecosystems that include different types of services aimed at improving the overall user
experience and at fostering customer loyalty toward a specific ecosystem. While the basic idea
underlying mobile payments still experiences certain hindrances


for ins
tance concerning cross
-
border interoperability of payment transactions between the different EU Member States


the scope
of new mobile wallet ecosystems raises new questions. Not merely allowing for the execution of a
purchase transaction, many of these m
obile wallets also include loyalty schemes, services for
customer social interaction


e.g. bill splitter applications


or even virtual alternative currencies that
can be used within a specific ecosystem


such as
Amazon Coins
. By extending the scope of t
heir
services beyond that

of a simple intermediary,
and especially when establishing a virtual economy
based on a virtual currency,
these service providers are bordering or
potentially
even entering the
territory governed by
more
stringent
financial regula
tions. This paper will analyze the extent to which
enhanced mobile wallets can become subject to such
regulation
.


1.

Introduction


While the precise methods for executing payment transactions have changed throughout history, the
core element of
such

transac
tion
s

remains that a certain value expressed in a predefined currency is
transferred from one party to another in exchange for
the
goods or services

agreed upon by those
parties
. With the advent of the Internet, more and more
payment transactions

are perfo
rmed using
a

networked
service or platform, leading to the rise of electronic commerce, or e
-
commerce
. This
trend has further developed with the
rise

of mobile communications
, to the extent that next to e
-
commerce and electronic payments there is now a particular interest in
so
-
called
m
-
commerce and
mobile payments
.
It has even been estimated that the total
global
value of mobile payments in 2014
could exceed USD 1 trillion.
1



In principle, four

main

methods for mobile payments can be distinguished.
2


First, there is the use of proximity technology


such as Near Field Communication (NFC)


that
allows payments to be executed without physical contact. An example of such scheme

is Google
Wallet, which
for its payments
combines the use of a software platform
in the form of a mobile
wallet


generally linked to the user’s credit card


with NFC technology embedded in smartphones
to execute
those
payments
wirelessly in collaboratio
n with

a number of affiliated vendors.
In
practice, a user operating within this ecosystem could, for instance, buy a coffee by simply waving his
smartphone by the vendor’s register as a means to execute and confirm payment.

Second, mobile payments can als
o be performed by use of SMS messages. Since this basic technology
is implemented in every mobile phone


thus not requiring a smartphone of a particular software



1

European Commission, Green Paper Towards an integrated European market for card, internet and mobile
payments, COM(2011) 941 final, 11 January 2012, 5.

2

T. Wulgaert
, “Mobile Payment Overview”, presented at Mobile Monday, Brussels, 4 June 2012.

3

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28


platform


it can be considered as the most accessible mobile payment scheme. Using this
tech
nology, the payments are linked to the user’s account with his mobile network provider. A
notable example is the M
-
Pesa platform, which has enjoyed a significant uptake in developing
countries Kenya and Tanzania

where access to banks is rare but
mobile
pho
nes are widely available
.
Also other micropayment services, such as Zong, are linked to an account with a mobile network
provider.

Third,
a mobile device could be used as the Point of Service for the payment transaction. An example
here is Square, which p
rovides a small card reader dongle that can be connected to most
smartphones and that can execute the payment transaction in combination with the thereto
provided software.

Last, transactions can be performed on the mobile Internet or by purchases within
a specific
application, so
-
called ‘in
-
app’ purchases. Here, the user interacts directly with the virtual platform
provided to perform and complete his purchases. Examples are the Apple App Store or Google Play.
While underlying payment methods may differ


both examples can be coupled to the user’s credit
card or to prepaid gift cards


they
provide the complete interface governing the payment
transaction.


T
he presence of divergent option
s

could be applauded as a way to ensure that almost every mobile
device user will have access to at least one of such mobile payments methods
. For instance, while
the use of proximity technologies
could become

the future of payment transactions in the weste
rn
world

as it already is in, for instance, Japan
3
, the use of the lesser advanced technology of executing
payments through the user’s mobile network provider subscription ensures that also developing
countries can benefit from the evolutions in mobile pay
ments. This diversity ensures that the user is
not required to buy into particular devices or mobile operating systems.


However,
the

division of the market into different competing and often incompatible ecosystems
inevitably includes a number of disadva
ntages. The main risk here would be that the user of a
competing ecosystem is locked out from benefiting from the
full
advantages of mobile payments. For
instance, if a vendor exclusively uses one particular platform, its customers that use a competing
pla
tform cannot benefit from platform
-
specific offers

and loyalty schemes
. The differentiation
between platforms can also result in the use of competing technological standards
4
, or in differences
in security of the platform and the degree of user control. Wh
ile such differences can be the
determining factor for the user in adopting the one or the other platform, this fragmentation can
also slow down overall growth and uptake of mobile payments.
5

Even though e
-
commerce has been
steadily rising over the past fe
w years,
mobile payments

remain

only a very small percentage of
this



3

R. Halpin, R. Moore, “Developments in electronic money regulation


the Electronic Money Directive: A better
deal for e
-
money issuers?”,
Computer Law & Security Review
(200
9) 25, 567.

4

D. Bohn, “The mobile payments mess: no one's winning, but we're all losing”,
TheVerge.com,
9 May 2012.
Also research from Deutsche Bank found that “
the lack of interoperability with other systems, proprietary
software and different technologi
cal standards are making it increasingly difficult for the end
-
consumer to
utilise services from third parties that are not geared towards the standards and restrictions of the ecosystem
”.
T. Dapp, A. Stobbe, P. Wruuck, et al., “The future of (mobile) paym
ents
-

New (online) players competing with
banks”,
dbresearch.
com, 20 December 2012, 20.

5

Tackling the problem of fragmentation and lack of interoperability is also one of the main priorities in further
developing the Single Euro Payments Area (SEPA). Eu
ropean Commission, “Communication of 10 September
2009 on Completing SEPA: a Roadmap for 2009
-
2012”,
COM(2009) 471 final
, 10
-
11.

4

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28


market
.
6

Some of the reasons for this are precisely the high fragmentation in payment transactions,
especially concerning the lack of cross
-
border interoperability of payment transactions
.
7



Because of this, it is important to foster user trust in mobile payment ecosystems, in order to support
and raise uptake and to contribute to the further development of this market. However, as can
already be understood from the previous paragraphs, m
any issues regarding mobile payment
ecosystems remain
, also on a regulatory level
. This paper will focus on one particular issue: the
legal
status of
mobile wallets and
virtual alternative currencies.


Many mobile wallet ecosystems have issued virtual alte
rnative currencies in one form or the other.
8

In certain cases, this currency is deployed as a form of loyalty scheme, where
particular

user behavior
or consumption is rewarded with units of the virtual alternative currency. In other cases, the virtual
alt
ernative currency is considered as the only valid unit of payment within a particular ecosystem,
requiring users to exchange their real world currency for units of the virtual alternative currency.
9


The extent to which such virtual alternative currency is

used and enforced

within a mobile wallet
scheme

may give rise to legal concerns. For instance, given the
regulatory

framework on electronic
money, it may be questioned whether
a

virtual alternative currency cannot be understood as
electronic money, with t
he issuers then
acting as

electronic money institutions.
Given the stricter
regulations applicable to electronic money institutions and the broader protection offered to users of
electronic money schemes, it may be more beneficial to the user to have a vir
tual alternative
currency considered as electronic money than as, for instance, a regular loyalty scheme. However, as
the precise scope of the legal framework on electronic money currently remains rather unclear, it is
not always possible for the user to m
ake this distinction. This can result in a lack of legal certainty on
the specific legal framework regarding a particular mobile wallet ecosystem, which in turn can hinder
further growth of mobile payments.


To this end, this paper will first conduct a br
ief analysis of different mobile wallet schemes in order to
identify the place of virtual alternative currencies within such scheme. Next, it will look more closely
at the figure of virtual alternative currencies and the specific
types

of their deployment.

It will
subsequently analyze the current legal framework on electronic money, as applicable within the EU.
That analysis will serve as the basis on which it is assessed in what way the legal framework displays
gaps and incompatibilities when applied to vi
rtual alternative currencies issued within mobile wallet
ecosystems. The identification and explanation of such gaps and incompatibilities invites to further
research on how to further provide the user of mobile wallet schemes with more legal certainty.






6

For instance, if mobile payments would reach USD 2.4 billon, it would still only be around 8% of the total US
market for e
-
co
mmerce. OECD, “Report on Consumer Protection in Online and Mobile Payments”, OECD Digital
Economy Papers, No. 204, 2012, OECD Publishing,
http://dx.doi.org/10.1787/5k9490gwp7f3
-
en
, 14.

7

For instance, much uncertainty remains regarding the multilateral in
terchange fees (MIF) levied between
payment service providers, which are often high enough to hinder growth, European Commission, Green Paper
Towards an integrated European market for card, internet and mobile payments, COM(2011) 941 final, 11
January 2012
, 7
-
8.

8

For instance: Facebook, Microsoft, Amazon and Zynga.

9

E.g. Microsoft Points are as of currently the only method of payment on the online services of Microsoft,
including the popular Xbox Live platform. While the online services of Windows 8 now a
lso support real world
currency, the Microsoft Points remain the sole currency on Xbox Live. T. Warren, “Microsoft confirms cash for
Xbox content in Windows 8, Microsoft Points remain for Xbox 360”,
theverge.com,
9 October 2012. However,
with the presentat
ion of the Xbox One console, Microsoft has announced that Microsoft Points will be phased
out and converted to local currency:
support.xbox.com/en
-
US/billing
-
and
-
subscriptions/account
-
management/microsoft
-
points
-
retire
-
faq.

5

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28


2.

M
obile wallets


This part will briefly introduce a number of mobile wallet schemes in order to identify their main
components and to establish a better understanding of the place of virtual alternative currencies
within such schemes.
M
obile wallets can
simply be

considered as a logical evolution of

e
-
commerce
service providers that picked up on new technologies and introduced new ways of facilitating
payment transactions and customer binding.
When e
-
commerce started to grow, service providers
such as Pay
Pal entered the market to facilitate online payment transactions as traditional physical
payments were no
t

possible in an online environment. With the focus of the market shifting toward
mobile payments, it is no surprise that many service providers aim th
eir businesses at this rising
market.
However, the influx of new market players has also lead to an expansion of services, in order
to provide a distinctive feature that would serve to
differentiate

one service provider from another

and thus seem more appe
aling to users
. While PayPal has traditionally positioned itself as a mere
intermediary
10
, this position is becoming less sustainable for the providers of services generally
branded as mobile wallets.


As the term already suggests, mobile wallets can be un
derstood as a digitalization of the user’s
physical wallet onto a mobile device.
Certain service providers take this notion very literally. Lemon
Wallet, for instance, is an application that allows the user to make a digital copy of all the physical
cards
in a user’s wallet, such as bank cards, identification cards, loyalty cards, etc.
11

In a more
interactive feature, it can also serve to personalize loyalty rewards when used with selected vendors.
Apple has included a similar application in its iOS: Passboo
k. This application can store coupons,
boarding passes, tickets, loyalty cards, etc.
12

The added value of Passbook over Lemon is that
Passbook can interact with the user, for instance by notifying if a flight changed gates.
These two
examples are mobile wal
lets in the strictest sense. They provide a service to the user that enables a
digitalization of classic physical cards found in a wallet and, at most, serve as an intermediary in
further transactions based on those cards.


An example in the same vein, ye
t with slightly more advanced features, is Google Wallet.
13

This
mobile wallet also allows the user to store several types of card in the application


such as credit
and debit cards, but also rewards cards. However, the main focus here is not so much to pr
ovide a
digitalized wallet, but to facilitate payment transactions. Google Wallet can be used
as a digital
platform
for online payments, but also uses NFC to execute payments transactions with affiliated
physical
vendors. In doing so, the proximity technol
ogy serves as one of the distinctive points of
differentiation of this service. On top, the wallet is integrated with other Google products, such as
Google Offers, which provides specific discounts to its users. As such, Google Wallet does implement
a loya
lty scheme of sorts, but uses

a

real currency

notation

throughout all stages of its services.


Square offers
features
similar to Google Wallet
.
14

It provides a digital storage for all kinds of cards


payment or loyalty


and
allows merchants to offer

specific loyalty rewards to its users. The main
point of differentiation here is that Square acts as the actual point of sale (POS) by executing a
payment transaction by swiping a payment card’s magnetic stripe through the dongle that can be
connected to
a mobile device. It therefore does not rely on technology present in the mobile device





10

For instance, in the US PayPal

is not subject to broad regulation and therefore its relationship with its
customers is fully governed by the user agreement. In Europe, however, PayPal has registered as a financial
service provider in Luxembourg.

11

www.lemon.com
.

12

www.apple.com/ios/whats
-
new/#passbook
.

13

www.google.com/wallet
. While the Google Wallet’s online payment service is widely available, the use of
NFC technology for payment at physical vendors is currently only available in the US.

14

www.squareup.com
, curr
ently available in the US and Canada.

6

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28


such as NFC


but on proprietary hardware it provides. A European alternative, iZettle, uses
hardware that can read the payment card’s chip and thus use
s

the card’s

PI
N technology for more
advanced security.
15



When looking at a more classic digital loyalty rewards program, the
Belgian
mobile virtual network
operator (MVNO) Mobile Vikings provides a good example.
16

To ensure the further growth of its
network, Mobile Viki
ngs encourages its users to attract new customers by rewarding them with
Viking Points. For each customer brought in, a user receives 150 Viking Points, which can be used
to
top up the mobile subscription. Alternatively, these Viking Points can also be pur
chased for later use.
In doing so, the Viking Points can serve as a
n accepted

alternative

currency on the Mobile Vikings
platform, while still being rooted in the loyalty program.


In other examples, the use of a virtual alternative currency can greatly
exceed the scope of a mere
loyalty program and become the only currency accepted on the service provider’s platform. An
example here is the online store used in different Microsoft platforms, such as the gaming platform
Xbox Live.
17

Apart from providing a p
latform for social interaction between Xbox users, Xbox Live also
provides a platform for the purchase of games and additional downloadable content, music and
video. Such purchases can only be made in the Microsoft issued Microsoft Points.
18

Such Points nee
d
to be obtained by buying prepaid cards of a specific denomination, with an 800 Point card selling for
USD 10.
19

Once obtained, these points are non
-
transferable and cannot be exchanged back to real
world currency. This may pos
e problems to very casual use
rs:

b
y requiring users to obtain Microsoft
Points in blocks instead of just exchanging the precise value required, users are forced to acquire
more Points than they might need.
20

For instance, a single song may cost 79 Microsoft Points, which
translates int
o USD 99 cents. However, Points can only be purchased with a minimum of 400,
equaling to USD 5. Thus, the user is required to spend USD 4,01 more than desired.
While not a
mobile wallet in the broader sense of the word


the Microsoft platform does not pro
vide a
digitalized storage for payment or loyalty cards


the user account containing Microsoft Points does
fulfill the basic premises of a wallet for use within that particular platform
.


Similarly, Facebook adopted a similar plan with Facebook Credits. E
xchanging USD 1 to 10 Facebook
Credits, these Credits were intended to become the main currency on the Facebook platform, which
includes the applications of third party service providers such as game developer Zynga.
21

By keeping
30% of all revenue on this
virtual alternative currency, Facebook Credits were intended as a
profitable business model.
22

However, many service providers on the Facebook platform decided to
adopt their own currency within their services, requiring users to exchange real money into Credits
and again into another virtual alternative currency. As a result, Facebook allowed its
service
providers to charge their users directly in the user’s local currency, thus eliminating the need for
Facebook Credits.
23

Amazon is currently developing a similar platform: users of its Kindle Fire tablet



15

www.izettle.com
, currently available in Sweden, Finland, Norway, Denmark, Spain and the UK.

16

mobilevikings.com/bel/nl/vikingpoints
.

17

www.xbox.com/live
.

18

As briefly noted before, Microsoft has announced to phas
e out its Microsoft Points in favor of the user’s local
currency.

19

Note the difference with prepaid value cards such as paysafecard. While the prepaid Microsoft Points cards
are denominated in Microsoft Points and are therefore only usable within the Mic
rosoft provided network,
paysafecards are denominated in real world currencies and can be used in a broader network of affiliated
vendors and service providers.

20

W. Mossberg, “Microsoft’s Zune challenges iPod”,
allthingsd.com
, 9 November 2006.

21

E. Eldo
n, “Facebook Sets July, 1, 2011 Deadline to Make Credits Sole Canvas Game Payment Option”,
insidefacebook.com
, 24 January 2011.

22

M. Helft, “Facebook Hopes Credits Make Dollars”,
NYTimes
, 22 September 2010.

23

developers.facebook.com/blog/post/2012/06/19/
introducing
-
subscriptions
-
and
-
local
-
currency
-
pricing
.

7

/
28


will be able to purchase Amazon Coins, which
can be used to purchase applications on the Amazon
Appstore platform.
24

Interestingly, Amazon Coins will exchange 1 Coin for USD 1 cent, thus
preventing locking in users for higher amounts than required for their desired purchase.


The platforms maintained

by Microsoft and Facebook are variations on the well
-
known concept of
the application store, popularized by Apple and Google. Being the providers of the two most
dominant mobile device operating systems


respectively iOS and Android


Apple and Google bo
th
maintain an online platform where developers can promote the applications they have created for
these software platforms and where users can obtain such applications. The Apple App Store has
garnered over 5
0 bill
i
on downloads
25
, with the last reported fi
gure for Google Play standing at
48

bill
i
on downloads
26
.
These platforms are operated as so
-
called ‘walled gardens’ where the service
providers


Apple and Google


define the rules.
27

As such, these platforms do not just facilitate a
transaction between the

user and the developer of an application, but rather let the user buy the
application directly from the service provider



Apple and Google


who in turn will forward the
developer his share of the earnings.

These platforms could be regarded as mobile wal
lets in the
sense that they allow the user to store a certain store credit in their purchase account


for instance
by prepaid cards
28



and in that they provide their users with easy payment methods. In the case of
Google, for instance, its online Google W
allet service can be used for payments in Google Play. The
main difference with the aforementioned stores operated by Microsoft and Facebook is that the App
Store and Google Play do not rely on virtual alternative currencies.


This brief overview demonstr
ates the differentiation between mobile wallet service providers. While
certain services are merely focused on providing a digitalized version of payment and loyalty cards


like Lemon


other focus clearly on facilitating payments. In the latter group, th
ere are service
providers relying on proximity technologies


such as Google Wallet


and service providers that use
proprietary hardware to act as the point of sale itself


Square. In general, most mobile wallet service
providers seem to implement a loya
lty scheme in one way or another, to further foster customer
binding. However, it is in this customer binding that mobile wallets start to extend their reach to the
limits


or beyond


of what can be considered as an intermediary service provider. For ins
tance,
while rewarding certain user behavior with points that can later be exchanged into a service that
would normally require payment



as Mobile Vikings does


can still be considered as a regular
loyalty program service, the broader use of virtual alte
rnative currencies beyond mere loyalty
rewarding


as is the case for Microsoft and Amazon


can become a reason for concern.


It is here that a distinction must be made between mobile payments and mobile banking. Mobile
payments, as generally understood
here, concern the facilitation of a financial transaction. Such
transaction does not necessitate a bank to be party, the service provider can act as a simple
intermediary.
29

Mobile banking, on the other hand, concerns the provision of banking services
throu
gh mobile means. Much like online banking, these services are
generally expected by actual
banks and may call for t
ighter regulation. While the issuance of a virtual alternative currency does
not necessarily indicate the presence of mobile banking services
, it could become subject to specific
regulation and supervision if it can be qualified as the issuance of electronic money.
30

As a result, it is



24

phx.corporate
-
ir.net/phoenix.zhtml?c=176060&p=irol
-
newsArticle&ID=1781498.

25

www.apple.com/pr/library/2013/05/16Apples
-
App
-
Store
-
Marks
-
Historic
-
50
-
Billionth
-
Download.html.

26

officialandroid.blogspot.be/2013/05/androidio
-
just
-
press
-
play.html.

27

T. Dapp, A. Stobbe, P. Wruuck, et al., “The future of (mobile) payments
-

New (online) players competing with
banks”,
dbresearch.
com, 20 December 2012, 18
-
19.

28

Apple App Store:
store.apple.com/be
-
nl/browse/home/giftcards/itunes/gallery
, Google Play:
play.google.com/intl/en
-
US_us/about/giftcards.

29

R. Weber, A. Darbellay, “Legal issues in mobile banking”,
Journal of Banking Regulation

(2010) 11, 131.

30

Ibid.
, 131.


8

/
28


important to establish and observe the threshold: when do the services offered within a mobile
wallet become a
mobile banking scheme rather than a mobile payment scheme?


3.

Virtual Alternative Currencies


In the previous

section, it has already become clear that certain mobile wallet service providers go
beyond the scope of offering
simple intermediary services in ex
ecuting mobile transactions. In
certain cases, a virtual alternative currency is used instead of the user’s or service provider’s
local

real world currency. Here, the notion of virtual alternative currencies will be analyzed in order to
understand its scop
e and potential underlying regulatory issues.


Money has changed considerably

throughout the ages.
31

In early societies, payments were executed
by exchanging goods or services against commodities, such as cattle or precious metals. Later, money
became commo
dity
-
backed, meaning that no longer commodities were exchanged but paper
representing the value of commodity. In principle, this paper could be exchanged for a fixed value of
the commodity it represented.
Nowadays, this exchange is no longer possible. Mone
y is issued by a
trusted central bank and derives its value from the trust in that authority. Together with the rise of
the Internet, virtual communities and interactions have resulted in the development of digital
transactions, without a physical counterp
art. This has resulted in the creation of currencies without
physical counterpart, virtual alternative currencies. They are virtual in the sense that they have no
physical counterpart and they are alternative in the sense that they are not issued by a cent
ral
trusted bank. Lawmakers have attempted to regulate this phenomenon, which has resulted in a legal
framework governing so
-
called electronic money. However, as will be discussed in a later section, the
scope of this legal framework is limited and does no
t cover the whole breadth of virtual currencies.
As a result, the current status of different types of money can be summarized in the following matrix:













Fig.1: Money matrix
32


In the
physical
regulated field, there is of course the well
-
known banknotes and coins. Also electronic
money is regulated, for as far as its scope
goes.

Bank transfers are also conducted digitally, yet are
still bound to the amount of money in a user’s account, connected to physical regulated currency.

While local physical money is generally unregulated, it poses relatively small risks due to its phy
sical
and local nature.
33

On the digital level, however, virtual alternative currencies have the potential to
reach a much broader audience precisely due to their digital nature.





31

European Cen
tral Bank, “Virtual Currency Schemes”,
ecb.europa.eu
, 2012, 9.

32

Ibid.
, 11.

33

An example are
Torekes
, a local currency used in a Ghent municipal district. This currency is obtained by
performing certain community services and can be used for small purchase
s at local vendors, such as bakeries.
www.torekes.be
.


Physical


Digital

Unregulated


Certain types of local
currencies


Virtual
alternative
currency

Regulated


Banknotes and coins


E
-
money
,

Commercial bank
money (deposits)


9

/
28


Virtual alternative currencies are therefore

generally

characterized by bein
g digital, unregulated and
issued by a certain service provider

for use within the community or

platform maintained by that
service provider. As discussed in the previous section, such currency can be obtained by purchase
against regulated currency, or by
the user displaying certain behavior that is rewarded in such
currency.


The reasons for implementing a virtual alternative currency can be manifold.
34

As already discussed,
a virtual alternative currency can serve as a loyalty scheme, as is the case for th
e Viking Points.
Virtual alternative currencies can also serve as another means for revenue, as is the case for
Facebook Credits, where Facebook holds 30% of all revenue made on such transactions. It can also
be used to lock the user in a certain platform.

This is the case when the user

needs to perform
regular actions to earn more units of the currency, or


as with Microsoft Points


where the user is
required to purchase a larger amount of the currency than he may need or want, thus providing
incentive f
or further spending.


While it is difficult to categorize the broad spectrum of virtual alternative currency schemes, research
conducted by the European Central Bank (ECB) has
identified

three main types
35
:




Closed virtual currency schemes

are completely
cut off from interaction with the
global economy. In such scheme, the virtual alternative currency can only be
obtained by activities within the platform in which the scheme operates. Purchase
against regulated currency or exchange thereto is not possible
or at least not
condoned.
36




Unidirectional virtual currency schemes
are the term coined for the earlier discussed
Facebook Credits and Microsoft Points. They can be obtained by purchase against
regulated currency, but cannot be exchanged back.



Bidirectional virtual currency schemes
are
fully convertible and can be purchased by
and sold against regulated currency. An example here is Bitcoin, for which various
trading platforms have been developed.
37



This classification already makes it clear tha
t most types of virtual alternative currencies will fall
under the second type, being unidirectional virtual currency schemes. Also
many
loyalty programs,
such as the discussed Viking Points, can be considered to fall under this type as they can
often
be
o
btained against regulated currency but cannot be exchanged back. However, while this
classification shows the diversity of virtual alternative currency schemes, they show little inherent
difference in that all such schemes are fully maintained under the co
ntrol of their issuing service
provider, who is unlikely to be a regulated institution such as a bank.


It is in this distinction that the inherent risk of virtual alternative currencies lies. By being virtual, a
virtual alternative currency scheme could
potentially reach a large audience of users, also displaying
a clear chance of cross
-
border

transfers. This could raise concerns, for instance regarding money



34

See also: European Central Bank, “Virtual Currency Schemes”,
ecb.europa.eu
, 2012, 18.

35

Ibid.
, 13
-
14.

36

Examples include so
-
called massively multiplayer online role
-
playing games (MMORPG) such as Worl
d of
Warcraft. In such examples, the user may have to pay in order to play the game, but he does not directly pay to
advance in the game or to gain more items within the game. As such, the in
-
game economy is kept completely
separate from the real
-
world eco
nomy. In many cases, however, a black market has developed where players
can obtain in
-
game objects against real world currency. The practice of playing such games for the sole purpose
of obtaining items that are sold against real world currency is known a
s gold farming.

37

The most well
-
known being Mt.Gox,
www.mtgox.com
; R. Grinberg, “Bitcoin: An Innovative Alternative Digital
Currency”,
Hastings Sci. & Tech. L.J.

(2012) 4, 166.

10

/
28


laundering or gambling. Also, the service provider could extend its platform, thus further extend
ing
the reach of the virtual alternative currency. An example here is Facebook, which has integrated
many third party service providers


such as game developers


within its platform, thus extending
the reach of its Credits far beyond the services offered

by Facebook itself. Also, by mainly operating
as unidirectional schemes, users are often forced to buy into the scheme for larger amounts than
they may have wanted, with no possibility of redeeming the regulated currency they invested in the
platform. How
ever, despite their potential for widespread global use, virtual alternative currencies
remain fully controlled by their issuing service provider and

could thus

escape the tighter legal
framework imposed on its regulated counterpart e
-
money.


This situation results in legal uncertainty to the user. If a mobile wallet service provider extends its
services beyond its reasonable scope by introducing and enforcing a virtual alternative currency,
it
should be assessed whether or not the service prov
ider has crossed the aforementioned threshold
between mobile payments and mobile banking. In t
erms of currency, this question

can be rephrased
as inquiring the threshold between unregulated virtual alternative currency and regulated e
-
money.
From the persp
ective of the user, the border between these two types of virtual currency may not
always be clear.
As will become clear from the next section, the legal framework regarding e
-
money
offers a broader protection to the user. For the user, it will therefore b
e important to know precisely
under which regulatory framework the virtual currency scheme he participates in operates. In order
to foster the further growth of mobile payments, it is important to ensure user trust in such schemes,
for which more legal cer
tainty is needed.
38


The legal uncertainty underlying virtual alternative currencies can best be illustrated by the example
of a specific virtual alternative currency, Bitcoin. Bitcoin is an atypical virtual alternative currency in
the sense that it is not
issued by a specific service provider. Instead, Bitcoins are decentralized and
generated by
an algorithm.
39

Being platform
-
independent, their exchange rate is governed by private
trade platforms.
40

As Bitcoins are bidirectional, users can purchase and sell t
hem, or acquire them
through other transactions or a Bitcoin generating activity known as ‘mining’.
41

By being platform
-
independent, Bitcoins can be used on various platforms and therefore have an even broader
potential for widespread use than the aforement
ioned examples of virtual alternative currencies.
However,
despite having

a potential for broader usage


and thus for broader misuse


Bitcoins have
a somewhat unclear legal status. This is the main reason why the Electronic Frontier Foundation (EFF)
has decided not to accept donations in Bitcoins anymore, citing “
untested legal concerns related to
securities law, the Stamp Payments Act,

tax evasion, consumer protection and money laundering,
among others

.
42

As any digital platform, Bitcoins and the Bitcoin trading platforms can be subject to
attacks. On one occasion, a successful attack compromising a large Bitcoin wallet resulted in the
exchange value of Bitcoins falling down from USD 17,5 to USD 0,01 in a matter of minutes.
43

As such,
the
total

v
alue of the whole Bitcoin platform almost completely evaporated, affecting all users that
ha
d

invested in this currency. This has not been the on
ly incident in which Bitcoins were
compromised. One particular case resulted in legal proceedings by a number of users against an
exchange platform that was hacked, citing that the platform provider “
neglected the safety of its
users’ money and cheated the
m out of withdrawal requests that it said it would honor

.
44

Such



38

R. Weber, A. Darbellay, “Legal issues in mobile banking”,
Journal of Bankin
g Regulation

(2010) 11, 139
-
140.

39

T. Lowenthal, “Bitcoin: inside the encrypted, peer
-
to
-
peer digital currency”,
Ars Technica
, 8 June 2011.

40

The most well
-
known being Mt.Gox,
www.mtgox.com.

41

Peck, M., “The cryptoanarchists’ answer to cash”,
IEEE
Spectrum

(2012), June 2012, 51
-
56.

42

C. Cohn, “EFF and Bitcoin”,
eff.org
, 20 June 2011.

43

European Central Bank, “Virtual Currency Schemes”,
ecb.europa.eu
, 2012, 26.

44

M. Geuss, “Bitcoinica users sue for $460k in lost Bitcoins”,
Ars Technica
, 12 August 20
12. This case is
currently still pending before the Superior Court of California: Brian Cartmell et al. vs. Bitcoinica LP, also known
as Bitcoinica et al., Superior Court of the State of California, County of San Francisco, CGC
-
12
-
522983.

11

/
28


incidents make it clear that virtual alternative currencies can pose a real threat to users and that
stricter regulation may be desirable in certain cases.
Precisely by its use as a method of

payment and
its


albeit dubious


status as an investment, users could start
treating

their interactivities with
Bitcoin as

if it were

a banking activity. However, it is clear that Bitcoin is not governed by a bank and
is therefore unlikely to offer the
service, protection and guarantees a bank generally offers.


4.

The

legal framework on e
-
money


The previous section has m
ade it clear that a distinction can be made between two main types of
virtual currency. Virtual alternative currencies are characterized

by their lack of specific regulation.
While these currencies of course do not op
erate in a perfect legal vacuum,

the examples given have
illustrated that their users may be harmed by the lack of a more mature and specialized legal
framework
governing

this

type of virtual currency. Such regulation can be found on the other end of
the virtual currency spectrum, namely on e
-
money. In this section, the legal framework regarding e
-
money in the European Union will be analyzed, in order to get a better understand
ing of how this
legal framework aims to protect the users of e
-
money.


As part of its efforts to further develop the European single market, the EU


by legislative initiative
of the European Commission


has adopted several instruments aimed at further in
tegrating the
market for pan
-
European cross
-
border payments. One of such initiatives is the Single Euro Payments
Area (SEPA), which aims to make cross
-
border payment transactions as easy as payment transactions
within a single Member State.
45

This initiativ
e was first coined by the European banking sector and
was subsequently endorsed by the European Commission and the European Central Bank. To further
facilitate this initiative, a directive was adopted to provide a clear legal framework for the SEPA

and
pay
ment services in general
.
46

For customers, this means that


amongst others


their debit cards
will be

accepted throughout the whole e
uro

area

and that cross
-
border bank transfers are now
executed within
one business

day.
This initiative replaced the exist
ing legal framework on cross
-
border credit transfers.
47

The existing framework on cross
-
border payments in euro
48

was later
replaced by a new regulation
49

in order to eliminate the charges for cross
-
border and national
payments in euro. In turn, this framewor
k was further amended and expanded in 2012.
50

According
to its article 87, the Payment Services Directive is up for rev
iew late 2012, with discussion o
n this
topic

expected further on in 2013. In the meantime, the Commission proposes


to update and
improve
the EU’s existing legal framework designed to protect the financial system against money
laundering and terrorist financing

.
51





45

Commission Cons
ultative paper on SEPA Incentives,
ec.europa.eu
, 13 February 2006.

46

Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment
services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and
2006/48/EC and
repealing Directive 97/5/EC,
OJ
L 319 of 5 December 2007, 1
-
36 (hereinafter: Payment Services Directive).

47

Directive 97/5/EC of the European Parliament and of the Council of 27 January 1997 on cross
-
border credit
transfers,
OJ

L 43 of 14 F
ebruary 1997, 25
-
30.

48

Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December 2001 on cross
-
border payments in euro,
OJ

L 344 of 28 December 2001, 13
-
16.

49

Regulation (EC) No 924/2009 of the European Parliament and of the

Council of 16 September 2009 on cross
-
border payments in the Community and repealing Regulation (EC) No 2560/2001,
OJ

L 266 of 9 October 2009,
11
-
18.

50

Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishin
g
technical and business requirements for credit transfers and direct debits in euro and amending Regulation
(EC) No 924/2009,
OJ

L 94 of 30 March 2012, 22
-
37.

51

europa.eu/rapid/press
-
release_IP
-
13
-
87_en.htm
.

12

/
28


Given the rise of electronic and mobile payments, the European Commission has also taken initiative
in the area of virtual
currencies.

In line with the terminology used before in this paper, such
regulated form of virtual currency can be addressed as electronic money, or e
-
money.

The
Commission’s interest in e
-
money, however, significantly predates the recent rise of mobile
pa
yments and the growth of services offered within mobile wallet ecosystems. A first proposal for a
clear regulatory framework regarding e
-
money was launched in 1998.
52

This resulted in a first
directive in this field in 2000.
53

This directive proved to be mor
e optimistic about the evolution of the
market for e
-
money than
turned out to be

the case, which is why during the review of the directive
steps were proposed to adopt amendments to this legal framework.
54

This has resulted in a new
directive, adopted in 20
09.
55


The Payment Services Directive and the E
-
money Directive form the basis of the EU
-
wide legal
framework on mobile payment schemes that include virtual currencies.


4.1.

The Payment Services Directive


The Payment Services Directive
provides a legal framew
ork for Payment Service providers (PSP) as
well as the “
rules concerning transparency of conditions and information requirements for payment

services, and the respective rights and obligations of payment service users and payment service
providers in
relation to the provision of payment services as a regular occupation or business
activity

.
56

The PSPs addressed by this directive are all regulated institutions.
57

A service provider
aspiring to become such PSP will therefore become subjected to specific r
egulation, under this
directive or other directives such as on credit institutions
58
.


The directive also defines a negative scope, indicating a list of situations
to

which it is not applicable.
Such situations can range from cash transfers between parties

without intermediary intervention
59

to
services that allow the user to withdraw cash from automated teller machines (ATM)
60
.

Within its
definitions, the directive further clarifies its scope. Payment services, as explicated in the annex to
the directive, ar
e s
ervices
that enable

cash

deposits and withdrawals
on payment account
s and
all
operations required for operating a

payment account
.
61

It also cover the “
execution of payment
transactions, including transfers of funds on a payment account with the user's p
ayment service
provider or with another payment service provider,

[including

the]

execution of payment transactions
through a payment card or a similar device
”.
62

While this also includes the issuance of payment
instruments and money remittance, it also cov
ers payment transactions executed and consented to



52

europa.eu/rapid/press
-
release_IP
-
98
-
727_en.h
tm
.

53

Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up,
pursuit of and prudential supervision of the business of electronic money institutions,
OJ

L 275 of 27 December
2000, 39
-
43.

54

Commission Staff

Working Document on the Review of the E
-
Money Directive (2000/46/EC) of 19 July 2006,
SEC(2006) 1049
, 15p.

55

Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking
up, pursuit and prudential supervision of the business of electronic money institutions amending Directives
2005/60/EC and 2006/48/EC and repealing Dire
ctive 2000/46/EC,
OJ

L 267 of 10 October 2009, 7
-
17.

56

Art. 1 Payment Services Directive.

57

Art. 1 Payment Services Directive specifies six categories of payment service providers.

58

Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up
and pursuit of the business of credit institutions,
OJ

L 177 of 30 June 2006, 1
-
200.

59

Art. 3 (a) Payment Services Directive.

60

Art. 3 (o) Paymen
t Services Directive.

61

Art. 4 (3) Payment Services Directive and annex.

62

Annex to Payment Services Directive.

13

/
28


by telecommunication, digital or IT devices to the provider of such device or network and acting as
an intermediary between the user and the supplier of the goods and services.
63



Important here is the
intermediate role of the telecommunication, digital or IT service provider, as a
broader role would disqualify the transaction of being a payment service
, according to one of the
more controversial exceptions to the directive
.
64

In principle, this exception would allow a service
provider to provide more services of added value, thus exceeding the role of a mere intermediary
and in doing so evade the application of this legal framework.

This exception, however, only applies
to goo
ds or services delivered to and used by telecommunication, digital or IT devices.
65

It therefore
does not apply when physical goods are purchased.

Another

scope limitation is defined in that the
directive does not apply to “
services based on instruments tha
t 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
”.
66

The
Payment Services Dire
ctive therefore only applies to payment services with a range beyond the
payment service provider’s network or range of goods or services, but where the payment service
provider plays only an intermediary role.
Also this exception to the scope of the Payme
nt Services
Directive is rather controversial, as will be discussed more elaborately later on.


The Payment Services Directive requires payment institutions



other than those already regulated
by other legislation


to be granted authorization in order t
o perform their tasks and duties.
67

As part
of their application to obtain such authorization
68
, candidate payment institutions must prove that
they hold sufficient capital, which can range from EUR 20.000 for money remittance services or EUR
50.000 for the
intermediaries for electronic transactions to EUR 120.000 for the other payment
services defined in the directive’s annex.
69

These institutions must also hold their own funds,
calculated according to one of the methods proposed by the directive.
70

The funds
received from the
payment service users

or through another payment service provider for the execution

of payment
transactions

must be safeguarded by keeping the funds of different users separate and protecting
them from other creditors, or by obtaining sui
table insurance for their value.
71

The directive provides
the general framework


to be transposed by the Member States


that governs the authorization
procedure, the withdrawal thereof and the registration of authorized payment institutions.
72

Apart
from t
he payment services identified in the directive’s annex, the authorized payment institutions
can perform a number of ancillary services.
73

Apart from this, the Payment Services Directive
contains provisions relating to the use of agents, the liability and r
ecordkeeping
duties of payment
institutions, the supervisions by competent authorities and the exercise of the right to establishment
and freedom to provide services.
74

For smaller payment institutions


executing transactions not
exceeding EUR 3 million per month


the competent authorities may waive the full or partial



63

Id.
This

provision

could

be understood as requiring the payments to be made directly to the intermediary
provider
, although this is not dir
ectly clear from the text of the directive
.

64

Art. 3 (l) Payment Services Directive.

65

Note also that in such case, the provider
could be viewed as not directly receiving

payments, although this
is
unclear from the text of the directive and
may be difficu
lt if not impossible for the user to discern.
According to
the PSD, only the technical service provider (art. 3 (j)) is prohibited from entering into possession of funds in
order to benefit from the scope exemption.

66

Art. 3 (k) Payment Services Directive
.

67

Art. 4 (4) Payment Services Directive.

68

Art. 5 Payment Services Directive.

69

Art. 6 Payment Services Directive.

70

Art. 7 and 8 Payment Services Directive.

71

Art. 9 Payment Services Directive.

72

Art. 10


15 Payment Services Directive.

73

Art. 16
Payment Services Directive.

74

Art. 17


25 Payment Services Directive.

14

/
28


authorization procedure.
75

Furthermore, the directive provides the framework
that needs to ensure
that the conditions set by payment insti
tutions are transparent and that they provide their users with
sufficient information.
76



Regarding the provision and use of payment services, the directive provides a number of general
principles with which payment transactions must comply, with possible
derogations for low value
payments


also referred to as micropayments.
77

For instance, transactions may only be executed
when the payer has given consent thereto.
78

Apart from imposing duties on the payment service
provider, the directive also requires the
user of such services to display certain behavior, such as
keeping the personalized security measures secret.
79

The onus of proof of proper authorization when
executing a payment transaction, however, is kept on the PSP.
80

In case of unauthorized payment
tra
nsactions, the directive provides clear rules on the division of liability between PSP and user
, as
well as on potential refunds
.
81

Payment orders must be received and


principally


executed within
one business day.
82

Users are responsible for payments mad
e to the wrong payee, if they provided
the wrong unique identifier for the intended payee.
83

To settle differences, the directive provides an
out
-
of
-
court settlement and redress procedure.
84



The Payment Services Directive needed to be transposed into natio
nal law by the Member States by
1 November 2009.

This was, however, only accomplished in 2011 when Poland adopted its
transposing measures.
85

As a result, the late 2012 review required by article 87 of the directive will
only be conducted throughout 2013

at

the earliest
, as it may be too early to already make a full
assessment of the impact of the directive.
86

In the meantime, a number of non
-
conformities
regarding the implementation of this legal framework in the national legal order of the Member
States wer
e identified, further impeding the full benefit from these provisions.
87

However
, the 2012
regulation
explicitly references the Payment Services Directive and its planned 2012 revision
, thus
putting more time pressure on this process
.
88



4.2.

The E
-
money
Directive


As noted, the current E
-
money Directive is the second major attempt by the EU to regulate the
matter of electronic currency. Its first attempt, the 2000 directive, had attained some of its original
objectives but never managed to enhance legal c
ertainty for the user in this field.
89

Even more so,



75

Art. 26 Payment Services Directive.

76

Art. 30


50 Payment Services Directive.

77

Art. 53 Payment Services Directive.

78

Art. 54 Payment Services Directive.

79

Art. 56 Payment Services Directive.

80

Art. 59 Payment Services Directive.

81

Art. 60


63 Payment Services Directive.

82

Art. 68


73 Payment Services Directive.

83

Art. 74 Payment Services Directive.

84

Art. 80


83 Payment Services Directive.

85

TIPIK, “Conformity Assessment of Directive 2007/64/EC, Poland”,
ec.europa.eu
, 13 March 2012.

86

R. Wandhöfer, “The 2012 Payment Services Directive Review: Too Much too Soon?”,
EPC Newsletter

(2012),
www.europeanpaymentscouncil.eu.

87

TIPIK, “Directive 2007
/64/EC
-

General report on the transposition by the Member States”,
ec.europa.eu,
2011.

88

Recital 32 Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012
establishing technical and business requirements for credit tra
nsfers and direct debits in euro and amending
Regulation (EC) No 924/2009,
OJ

L 94 of 30 March 2012, 22
-
37.

89

The Evaluation Partnership Limited, “Evaluation of the E
-
money Directive (2000/46/EC)
-

Final Report”,
ec.europa.eu
, 2006, 7
-
8.

15

/
28



some of its provisions were considered to have hindered the emergence of a true single market for
electronic money services and the development of such user
-
friendly services

.
90

Noting the legal
framewor
k set by the Payment Services Directive, the 2009 revision of the E
-
money Directive aims to
create a level playing field.
Interesting to note is that this directive also


in part


calls for full
harmonization in this matter, aiming at equal implementatio
n throughout the EU.
91

Also, in order to
allow for a more elaborate market to flourish in this field, the 2009 directive considers electronic
money institutions as payment providers instead of the more heavily regulated credit institutions.


Important to no
te in terms of scope, is that the E
-
money Directive clearly wants to establish a limited
focus.
92

As such, the E
-
money Directive applies only to payment service providers that issue
electronic money, and not to monetary value stored on specific prepaid inst
ruments with a limited
scope. As examples of such limited use prepaid instruments, the directive specifically mentions, for
instance, “
store cards, petrol cards, membership cards, public transport cards, meal vouchers or
vouchers for services
”.
93

This limitation of scope seems to
include

loyalty reward programs, which can
offer a certain value to their users, but are generally limited to a specific purpose. However, the
directive also states that these programs are only exempt from its scope becau
se of their use
limitations. If a scheme expands beyond its original platform and becomes a general
-
purpose
instrument, it can and should fall within the scope of the directive.
For other
scope limitations, the E
-
money Directive directly references the two

main scope limitations of the Payment Services
Directive.
94


As was the case for the Payment Services Directive, the E
-
money Directive is aimed at the providers,
here in the latter case being the electronic money issuers

or institutions
.
95

Only the properly

registered electronic money institutions are allowed to issue electronic money.
96

Electronic money is
defined as “
electronically, including magnetically, stored monetary value as represented by a claim on
the issuer which is issued on receipt of funds for
the purpose of making payment transactions as
defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal
person other than the electronic money issuer
”.
97

The scope limitation explained within the recitals of
th
e

di
rective is made apparent in this definition by the requirement to have the monetary value
accepted by a party other than the issuer of that value. When looking back at the research question
formulated earlier, this definition of the E
-
money Directive seems

to suggest that in terms of virtual
currency the threshold between regulated electronic money and an unregulated virtual alternative
currency
could already be found

in the scope of acceptance of the virtual currency.


Similar to the Payment Services Dire
ctive


and even directly referencing this instrument


the E
-
money Directive contains a number of provisions aimed at electronic money institutions and how
they conduct their business, including procedural rules in case of a corporate merger or takeover.
98

Also here, specific rules are set on initial capital and own funds that need to be held by electronic
money issuers, with the initial capital going up to EUR 350.000.
99

While electronic money institutions
can also provide additional services


such as the
payment services defined in the annex of the
Payment Services Directive


they must also adopt safeguards for the funds they have acquired in



90

Recital 2 E
-
mon
ey Directive.

91

Art. 16 E
-
money Directive.

92

Recital 5 E
-
money Directive.

93

Id.

94

Art. 1 (4) and (5) E
-
money Directive.

95

Art. 1 E
-
money Directive.

96

Art. 10 E
-
money Directive.

97

Art. 2 (2) E
-
money Directive.

98

Art. 3 E
-
money Directive.

99

Art. 4


5 E
-
money Directive.

16

/
28


exchange for the electronic money that has been issued.
100

If the electronic money institution has
not generated an
average outstanding electronic money of more than EUR 5.000.000


or less, as
defined by the Member States


the Member States can exempt that institution from certain of the
requirements for registration.
101

Electronic money must be issued
and redeemed
at

par

value

with
received funds.
102

The directive clearly states which transactions may become subject to fees, but
prohibits granting interest or other benefits relating to the duration of the user’s holding of the
electronic money funds.
103

As under the Payme
nt Services Directive, the E
-
money Directive provides
for an o
ut
-
of
-
court complaint and redress procedure for the

settlement of disputes
.
104


The E
-
money Directive should have been transposed by the Member States by 30 April 2011.
105

A
first review was envisio
ned together with that of the Payment Services Directive, by November
2012.
106

The transposit
ion of this directive has proven

to be a difficult process. By May 2012, a year
after the deadline set by the directive, there were still six Member States


Belgium
, Spain, France,
Cyprus, Poland and Portugal



that needed to implement these provisions.
107

By November 2012,
only Belgium still had not transposed the directive, with the European Commission referring the case
to the European Court of Justice and asking fo
r

a daily fine of

almost
EUR 60.000.
108

The Belgian act
implementing the directive was adopted within days of this notice.
109


5.

Applicability of the legal framework


After having analyzed the main provisions of the EU
-
wide legal framework set by the Payment
Services Dire
ctive and the E
-
money Directive, it will now be assessed in how far this legal framework
can apply to the broad range of mobile wallets and the potential issue of virtu
al alternative
currencies within such ecosystem
s
.


5.1.

Mobile wallet service pr
oviders as PSP


The first question to be answered here is whether the mobile wallet service providers


as discussed
before


can be considered as payment service providers under the scope of the Payment Services
Directive, and what the potential consequen
ces of such qualification would be.


As discussed before when briefly analyzing a number of mobile wallet services, it is difficult to define
a clear and straightforward categorization for the full breadth of services that can be found on the
current marke
t. Therefore, a typology based on the scope of services of different mobile wallet
ecosystems does not seem to suffice here to make a further assessment regarding the applicability of
the legal framework set by the Payment Services Directive. Rather, it co
uld be suggested to adopt a
typology of mobile
wallet service providers based on the
degree of involvement of the mobile wallet
platform service provider in executing the payment. As
already hinted at
, this degree of involvement



100

Art. 6


7 E
-
money Directive.

101

Art. 9 E
-
money Directive.

102

Art. 11 E
-
money Directive.

103

Art. 11


12 E
-
money Directive.

104

Art. 13 E
-
money Directive.

105

Art. 22 E
-
money Directive.

106

Art. 17 E
-
money Directive.

107

europa.
eu/rapid/press
-
release_IP
-
12
-
418_en.htm.

108

europa.eu/rapid/press
-
release_IP
-
12
-
1248_en.htm
.

109

Act of 27 November 2012 amending the act of 21 December 2009 concerning the statute of payment
institutions, access to the profession of payment service provider
and access to payment systems and of other
acts relating to the statute of payment institutions and institutions for electronic money and of the credit
institutions of the professional credit,
Belgian State Gazette
30 November 2012.

17

/
28


can be
a

determining factor

in qualifying a service as a payment service under the scope of the
Payment Services Directive or not.


For instance, it was noted that the Payment Services Directive view
s

payment transactions executed
and consented to via telecommunication, digital or IT devices to the provider of such device or
network and acting as an intermediary between the user and the supplier of the goods and services
as payment services under its s
cope. While this does resemble the model of the application store


such as Apple’s App Store and Google Play


discussed before, it must be reminded that the Payment
Services Directive
requires a broader span of services yet with limited involvement of th
e payment
service provider. In the

case of the Apple App Store and Google Play, it is clear that these service
providers are the curators of their systems and
,

as such, it could be argued that such service
providers provide an added value,
therefore have a

deeper involvement than that of a mere
intermediary.
110



Moreover,
as
the services of the Apple App Store and Google Play are mainly limited to the ‘walled
garden’ of their platform
,

it could be argued that the
range requirement of the payment services has

not been complied with, thus prohibiting the application of the Payment Services Directive. Given the
lack of clarity of what is meant with a ‘limited network of service providers’ or a ‘limited range of
goods or services’, arguments could be made either
way.
111

For instance, can the confinement of the
service to a particular application store platform be considered as a limited network of service
providers, even if that platform offers access to more than 275.000 developers in the US alone?
112

Can the limitat
ion of an application store to the offering of mobile applications be considered as a
limited range of goods, even if over 800.000 applications cater to a multitude of needs, ranging from
games to personal planners to weather forecasts?
113



Similar argument
s could be made for other mobile payment services.
Given the broad and unclear
terminology used in the exception for what can be referred to as value added services, every mobile
wallet service provider could, in theory, be exempt from the scope of applica
tion of the Payment
Services Directive by not acting as a mere intermediary, which can be interpreted as simply offering a
broader range of services beyond that of payment services.
114

As such, mobile wallets including the
use of proximity technologies


suc
h as Google Wallet


could
theoretically
escape the scope of
application of this directive by expanding their services.
115

The same reasoning goes for mobile
wallets that include virtual currencies. If a virtual currency can only be used within a particular
community, this could be interpreted as a limited network, thus
potentially
falling under the scope of
the ex
ce
ption.


The conclusion that can be drawn when assessing the applicability of the Payment Services Directive
to
different types of mobile wallets shows a somewhat counterintuitive and potentially dangerous
evolution. As discussed, mobile wallet platforms are greatly expanding the scope of their services.



110

Note, for instance, r
ecital 6 to the Payment Services Directive that holds that it is appropriate for the “
legal
framework to apply to cases where the operator acts
only

as an intermediary who simply arranges for payment
to be made to a third
-
party supplier
” (emphasis added).
Since the business model of most application stores is
broader than that of merely providing for the transfer of money from the user to the third party developer,
such activity does not seem to be envisioned to be covered by the scope of the Payment Servic
es Directive.

111

DLA Piper, “EU study on the Legal analysis of a Single Market for the Information Society
-

New rules for a
new age?”,
ec.europa.eu
, 2009, 18.

112

www.apple.com/about/job
-
creation.

113

www.apple.com/pr/library/2013/01/28Apple
-
Updates
-
iOS
-
to
-
6
-
1.html
.

114

DLA Piper, “EU study on the Legal analysis of a Single Market for the Information Society
-

New rules for a
new age?”,
ec.europa.eu
, 2009, 12
-
13.

115

Be it reminded though that this exception only applies to goods obtained through and used through
telecommunications, digital or IT devices.

18

/
28


Especially the introduction of so
-
called ‘walled gardens’ and
the use of virtual alternative currencies
can pose the user of such platforms at risk of being locked in, with little to no possibility of
redeeming the funds he invested in the platform
, nor with adequate guarantees to protect such
investments
. As such, i
t could be argued that this expansion of services warrants stricter regulation,
aimed at protecting the user. As the state of the art in the legal framework currently stands, the
Payment Services Directive seems to reward this expansion of services by pote
ntially recognizing it as
a way to escape its regulatory scope. The breadth and unclear formulation of the ex
ce
ptions for
service providers not acting as mere intermediaries and for services offered within a ‘limited
network’ and with ‘limited range’ can t
herefore be considered as
opening the door

to more legal
uncertainty for the user, rather than providing for more certainty.


5.2.

Scope of e
-
money



From the analysis of the text of the E
-
money Directive, the precise scope of the concept of e
-
money


as used within that legal framework


does not seem to be sufficiently clear yet. While the directive
does provide for a definition, there are many elemen
ts defining the full scope of this notion spread
throughout the directive.


First, it should be
reminded

that the aforementioned ex
ce
ptions of the Payment Services Directive
apply as well under the framework of the E
-
money Directive. Therefore, providers
of e
-
money
services
could

be exempt from the scope of application of this directive if they do not act as a mere
intermediary. Also, if their services are aimed at a ‘limited network’ of providers or a ‘limited range’
of goods and services, they will also
be exempt from this legal framework.


Second, the directive defines e
-
money as (1) an electronically stored value
(2)
that is represented by
a claim on the issuer,
(3
) that is
issued on the receipt of funds

for making payment transactions, and
(
4
) that is

accepted by institutions other than their issuer.
The last

element relates to the
exception
s
discussed above, indicating that a limited range of acceptance of a virtual currency can be considered
as impeding its qualification as e
-
money under the scope of the directive.


Third,
e
-
money must be issued at par value.
116

This means that one unit of e
-
money issued must
correspond to one unit of the real world currency against which it was issued
, which is meant to
allow for the user to have the monetary value of his e
-
money redeemed.

As will be discussed further
on, such could be an impediment to the
application of the framework set by the E
-
money Directive
to virtual currencies that do not
allow for bidirectional exchange and thus cannot be redeemed
, such
as Microsoft Points. In

order to facilitate redemption,
it ca
n be found that e
-
money

preserve
s

a
clear
link between the virtual currency and its real world counterpart.
117

In doing so, e
-
money will

generally

be expressed in the same units as those against which it was
exchanged, such as e
uros or
US d
ollars. This is not the case for unregulated virtual a
lternative currencies, which are expressed in
alternative notations, such as Microsoft Points, Amazon Coins or Facebook Credits. Because of this,
the exchange value between the real world currency and the virtual alternative currency may
fluctuate


as evi
denced in the Bitcoin example


which may make it more difficult for user to
retrieve his funds
, if those can be redeemed at all
.


Last, coming back to the
third

element of the definition found in the E
-
money Directive,
from the fact
that e
-
money is
issue
d

upon receipt of funds

it follows that the issuer of e
-
money cannot simply



116

Art. 11 E
-
money Directive.

117

European Central Bank, “Virtual Currency Schemes”,
ecb.europa.eu
, 2012, 16.

19

/
28


create new e
-
money units at will.
118

Because e
-
money can only be issued upon receipt of funds and
for an amount equaling the received funds, e
-
money can be considered as a prepaid go
od.
119

Also
this may
prevent

a number of virtual currency schemes from falling within the scope of the E
-
money
Directive.


5.3.

Virtual currencies in mobile wallets as e
-
money


Now that the precise scope of e
-
money


as understood under the framework of the E
-
money
Directive


has been more clearly defined, it can be assessed whether


and if so, in how far


the
virtual currencies issued within certain mobile wallet ecosystems
can indeed be considered as e
-
money or not.


As can already be gathered from the previous discussion, this
assessment
will not often be
very
straightforward
. In most cases, virtual alternative currencies are issued by the sole will of the service
provider

organizing the scheme. As such, they are not

necessarily

issued upon the receipt of funds. In
the case of Microsoft Points, for instance, Microsoft issues prepaid cards representing a certain value
in Points. These cards are issued at will and therefore d
o not require a pre
-
existing receipt of funds
from users. This already disqualifies this scheme from being considered as e
-
money. The same
reasoning goes for similar schemes.


Also the requirement of e
-
money being issued at par value will disqualify most
virtual currency
schemes from being recognized as e
-
money schemes. In most cases, the virtual currency
can only be
exchanged in a unidirectional way and will also
take the form of a unit invented by its issuer. Such is
the case with, for instance, Microsof
t Points, Facebook Credits and Amazon Coins.


Moreover, even if the previous requirements did not bar a virtual currency from being considered as
e
-
money under the scope of the E
-
money Directive, the broad
exception
s found in this directive
could still
withhold that virtual currency scheme from its scope of application
. As noted, the mere
fact that a service provider offers a broader range of services than only payment services may
already suffice to have this service provider exceed the scope of activit
ies of an intermediary, thus
possibly
evading the scope of application of the directive
, if the goods provided are to be used
through a telecommunications, digital or IT device
. In most cases, a service provider will only issue a
virtual currency as an add
ed service to other services, thus
possibly
exceeding the intermediary
requirement. In the case of Microsoft, for instance, its Xbox Live platform spans a broad range of
services of which the issuing of Microsoft Points is only a small element.
Furthermore
, in most cases
the use virtual currency will be limited to the issuer’s platform, for the range of goods and services
offered within that platform. This could suffice to satisfy the requirements of ‘limited network’ and
‘limited range’ in order to exempt
the scheme from the scope of application of the E
-
money
Directive. Also here
,

Microsoft Points could serve as an example, as these Points are not accepted
beyond Microsoft’s own platform. As noted before, also the definition of e
-
money provided in the
dire
ctive requires a virtual currency to be accepted by institutions other than the issuer in order to
be considered as e
-
money.


Similar conclusions can be drawn for virtual currencies as part of loyalty schemes. First, these
currencies are generally not

red
eemable

against real world currency
. Second, they are generally
issued as a reward for certain user behavior or activity, not
solely
upon receipt of funds. Third, their
use is generally limited to the platform of their issuer, who
will also consider

this virtual currency as
an added service instead of
as
its main service for which it serves as an intermediary. The application



118

R. W
eber, A. Darbellay, “Legal issues in mobile banking”,
Journal of Banking Regulation

(2010) 11, 135.

119

Id.

20

/
28


of the E
-
money Directive to loyalty schemes
will

therefore
in most


if not all


cases
be considered
as principally impossibl
e.
120


One remarkable case is that of PayPal.
Its terms of service clearly refer to
its activities issuing e
-
money, with
e
-
money

being defined

as a


monetary value, as represented as a claim on PayPal,
which is stored on an electronic device, issued on recei
pt of funds, and accepted as a means of
payment by persons other than PayPal”
.
121

In doing so, PayPal explicitly places its activities under the
scope of the E
-
money Directive. Moreover
,

the European subsidiary of PayPal is registered as a bank
in Luxembourg
, in

part

to comply with the legal framework applicable on its e
-
money issuing
activities. However, the ECB has argued that PayPal does not issue a virtual currency but funds the
accounts by credit transfer or credit card payment and that its activities sh
ould therefore rather be
identified as banking activities

instead of as e
-
money issuance
.
122

This case serves as a clear example
of how the terms of the two directives discussed here can be interpreted in rather divergent ways.


Interestingly,
following the

reasoning held by PayPal, simil
a
r

argument
s

could be made for mobile
wallets such as Google Wallet to fall under the scope of
the E
-
money

Directive
. Google Wallet
electronically stores a certain monetary value in the wallet


which constitutes a claim for

that value
on the service provider, Google


at

par

value

with the funds received for the issue of such value,
where this value can also be used for making payment transactions at institutions other than Google
itself.
123

However, also here the exception of the intermediary
could

apply, meaning that Google
could prevent its Wallet services from falling under the scope of the E
-
money Directive by offering
more than what can be considered as being mere intermediary services.
124

Given the broad
framework of services Google offers in this respect, such argument could be made.
However, despite
the
theoretical
ambiguity of the applicability of the legal framework on e
-
money on this particular
service, Google has applied to the UK Fi
nancial Services Authority (FSA) in order to become
registered as an Authorized Electronic Money Institution according to the national implementation of
the E
-
money Directive.
125

In this registration, Google Payments Limited has also indicated the
possibilit
y of offering its e
-
money services in other EU Member States.
126


When applying these findings to the specific case of Bitcoin



which as noted differs from most
virtual currency schemes discussed before


similar conclusions can be drawn.
As Bitcoins only e
xist
within the realm of the Internet, they can be considered as a monetary value that is electronically
stored. Bitcoins can also be used to execute payment transactions and are not bound to a specific
platform. Because of this, Bitcoins have a much broad
er range of use than the average virtual
alternative currency scheme, or at least the potential for it. However, by nature, Bitcoins are



120

This is further evidenced by recital 5 to the E
-
money Directive, which explicitly refers to instruments that are
generally part of a loyalty scheme

as not falling under its scope.

121

According to articles 1.1 and 15 (u) of its user agreement.
cms.paypal.com/be/cgi
-
bin/?cmd=_render
-
content&content_ID=ua/UserAgreement_full&locale.x=en_US.

122

European Central Bank, “Virtual Currency Schemes”,
ecb.europa
.eu
, 2012, 17.

123

Note that it is this wider acceptance that differentiates Google Wallet from closed systems, such as the
Apple App Store or even Google’s Play store. For the latter examples, it could be argued that the closed nature
of such application st
ores constitutes a ‘limited network’, thus benefiting from the scope exception.

124

Note that in the case of services like this, the user will often be unaware of whether or not the service
provider directly receives his payment or whether payments are proc
essed by a third party.

125

Google Payment Limited is registered under FSA Register Number 900008. As part of the ensuing
obligations, it provides information to its users regarding its capital level and liquid assets:
checkout.google.com/files/fsa_footer.ht
ml
. The UK implemented the E
-
money Directive as The Electronic
Money Regulations 2011,
S.I.
2011 No. 99.

126

While this registration could also be intended for future services, Google itself clearly identifies Google
Wallet as an e
-
money institution:
support
.google.com/wallet/bin/answer.py?hl=en
-
GB&answer=2417663&topic=8942&ctx=topic.

21

/
28


automatically generated and are therefore not issued upon the receipt of funds. Such would
disqualify Bitcoins from bei
ng considered as e
-
money under the scope of the E
-
money Directive.
127

In
principle, it could be argued that the services providers that issue Bitcoins to their users upon
payment in real world currency or the service providers that sell so
-
called ‘mining ser
vices’ could be
considered as e
-
money institutions.
128

Howeve
r, e
ven if Bitcoin could be considered as e
-
money, the
scope limitations of the E
-
money Directive could still fuel further discussion. For instance, it could be
argued that the wide potential of Bi
tcoin does not allow it to be exempt from the application of the
directive on the grounds of operating within a ‘limited network’ and serving for a ‘limited range’ of
goods and services. Conversely, it could be argued that this wide potential has not been
reached yet,
and that therefore the
exception

could still apply.
129

In any case,
because of the other objections
against the qualification of Bitcoin as e
-
money,
it can be concluded that the application of the legal
framework on e
-
money on
Bitcoin is rather
unlikely.


Despite the ongoing uncertainty regarding the precise legal status of Bitcoin


and similar
decentralized virtual alternative currencies


there are a number of evolutions to be discerned. First,
there is a growing consensus that income generate
d through Bitcoins


either by being paid in
Bitcoins for goods or services provided or by sheer speculation on its exchange rate


is and should
be taxable.
130

Second, in a move to foster more legitimacy, at least one Bitcoin exchange provider


Bitcoin
-
Central


has voluntarily put itself under the scope of EU regulation by registering as a
payment services provider.
131

While this may still be an isolated case, there is a growing tendency of
lawmakers

and law enforcement

to consider such service pr
oviders as being in the business of
providing financial services. The Financial Crimes Enforcement Network (FinCEN), part of the US
Department of the Treasury, has issued an opinion in which it confirms that Bitcoins are no regulated
currency, thus clearin
g users from obligations under FinCEN’s regulations.
132

However, providers of
Bitcoin exchange services are considered as money transmitters under FinCEN’s regulations and are
therefore required to register as a money services business (MSB) as “
the definiti
on of a money
transmitter does not differentiate between real currencies and convertible virtual currencies
”.
133

Also
California’s Department of Financial Institutions

has taken a stand on the matter by issuing a cease
and desist warning to the Bitcoin Found
ation, a non
-
profit organization that serves as the
coordinator and promoter of the wider Bitcoin community.
134

The reason for the cease and desist is
that the Bitcoin Foundation has not obtained a license for its business of money transmission,
violating th
e California Financial Code. This is a remarkable move, as the Bitcoin Foundation does not
perform Bitcoin transfers itself


these are performed by Bitcoin exchange service providers


but
also in that it clearly follows the FinCEN’s opinion that such ser
vice providers are required to register
as financial service providers, even though the currency they serve may not be a regulated currency.


The general conclusion from this overview is that it is
rather

impossible to assess with definitive
certainty whe
ther

any of the mobile wallet schemes that include a virtual currency of one type or
another discussed here can be considered as e
-
money under the scope of the E
-
money Directive.

In



127

R. Stokes, “Virtual money laundering: the case of Bitcoin and the Linden dollar”,
Information &
Communications Technology Law

(2012) 21, 227
-
228.

128

E. Jacobs, “Bitcoin : A Bi
t Too Far?”,
Journal of Internet Banking and Commerce

(2011) 16.

129

Id.

130

The Dutch Finance Minister Dijsselbloem
, for instance, recognized that Bitcoins do not correspond to the
definition of e
-
money, but held that all income generated through economic activities is taxable, even if
received in an unregulated currency such as Bitcoin.
A. Wokke, “Nederlanders moeten
belasting betalen over
geld verdiend in Bitcoins”,
tweakers.net
, 7 June 2013.

131

X, “Virtual cash exchange becomes bank”,
bbc.co.uk
, 7 December 2012.

132

FinCEN, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual
Cur
rencies”,
fincen.gov
, FIN
-
2013
-
G001, 18 March 2013, 2.

133

Ibid.
, 3.

134

J. Matonis, “Bitcoin Foundation Receives Cease And Desist Order From California”,
Forbes
, 23 June 2013.

22

/
28


all cases, arguments could be made both for and against the application of

this legal framework and
full certainty can only be found in the rare cases where the service provider has settled the issue by
registering as an e
-
money institution, as has happened with Google Payments Limited.

Two
important reasons have been identified

for this.


First,
it is clear that the definition of e
-
money


as found within the E
-
money Directive


already
excludes many virtual currency schemes by default. For instance, as many virtual currencies are not
issued upon receipt of funds, but rather by
the sole intention of the issuer thereto, these schemes
already cannot fall within the scope of application of the E
-
money Directive. Also the requirement
that e
-
money must be
redeemable

exempts most schemes as they are more likely to
maintain

a

unidirecti
onal exchange
. The problem of the limited definition of e
-
money seems to be a
continuation of the problems encountered under the 2000 directive.
135

Under the definition
employed in this directive, a number of Member States made an interpretation in their nat
ional
implementation of the directive that considered mobile operators issuing prepaid phone cards as e
-
money institutions.
136

This prompted the European Commission to issue a press release in which it
attempted to establish a common interpretation. According to its findings, the Commission held that
prepaid phone cards should not be considered as an issuance of e
-
money if they w
ere only used to
obtain phone airtime.
137

Only when the card could be used to purchase services supplied by third
parties, it could be considered as e
-
money.
138

Also under the 2000 directive,
the definition of e
-
money focused on a monetary value stored on elec
tronic devices, which considering the rise of
cloud
-
based services raised the question regarding server
-
stored monetary value.
139

While this
problem was addressed by the new directive, it appears that a number of other issues have
remained. In trying to pres
erve its technological neutrality, the directive remains unspecified
regarding its application to the rising services of mobile payments


or even virtual economies


that
are now offered. While it can be argued that the limited scope of its definition was

drafted on
purpose, in order to prevent ‘overregulating’ this domain and thus hindering further economic
growth in this sector, it can also be argued that precisely this limited and often unclear scope could
just as well
be an important factor in hinderin
g economic growth. From the perspective of the user,
there will always be a certain need for sufficient trustworthiness of a system before deciding upon
using it.
140

When it is unclear under which legal framework a system operates


and thus which
protection

is offered to the users of that system


the user may refrain from adopting it.


Second, there is the broad range of
exception
s from the scope of application of the E
-
money
Directive. As was the case under the Payment Services Directive, the E
-
money Dire
ctive will not apply
to
cases where the service provider does not act as a mere intermediary. Because of this, the mere
provision of additional services beyond that of a payment service could
possibly

allow a service
provider to evade the scope of applicat
ion of this legal framework. As nor the Payment Services



135

M. Krueger, “E
-
money regulation in the EU”, In: R. Pringle, M. Robinson (eds.),

E
-
Money and Payment
Systems Review
, London, Centralbanking (2002), 239
-
251.

136

DLA Piper, “EU study on the Legal analysis of a Single Market for the Information Society
-

New rules for a
new age?”,
ec.europa.eu
, 2009, 19.

137

europa.eu/rapid/press
-
release_I
P
-
04
-
620_en.htm.

138

Likewise, prepaid cards denominated in a real world currency that can be used for purchase transactions at
a multitude of vendors or service providers


such as paysafecard


can be considered as e
-
money. Note,
however, that this does no
t mean that all prepaid cards in such denomination are considered e
-
money.
Vouchers, for instance, are generally limited to use at one particular vendor or service provider, thus falling
under the scope of the ‘limited network’ exception.

139

DLA Piper, “EU study on the Legal analysis of a Single Market for the Information Society
-

New rules for a
new age?”,
ec.europa.eu
, 2009, 17. See also: R. Halpin, R. Moore, “Developments in electronic money
regulation


the Electronic Money Directive: A
better deal for e
-
money issuers?”,
Computer Law & Security
Review
(2009) 25, 565.

140

R. Weber, A. Darbellay, “Legal issues in mobile banking”,
Journal of Banking Regulation

(2010) 11, 139
-
140.

23

/
28


Directive nor the E
-
money Directive define a threshold at which a service provider ceases to be a
mere intermediary, any additional service could be argued to suffice in order to allow for the
applic
ation of this
exception
. Additionally, a second
exception

allows the schemes with a limited
scope to escape the application of both directive. Again, there is no clear definition regarding the
scope of this
exception
, which only references services that op
erate within a ‘limited network’ of
providers and that apply to a ‘limited range’ of goods and services. Also here, arguments could be
made either way, allowing the issuers of a virtual currency to make an argument for the application
of this
exception

to
their case, thus evading the application of the directives.


5.4.

The threshold of e
-
money


In the previous section it was already made clear that the threshold for a virtual currency scheme to
be considered as e
-
money under the scope of the E
-
money Directive
has been put rather high. By
making it difficult to meet all the different elements of the definition of e
-
money, most of virtual
currency schemes introduced in mobile wallet service platforms will contain at least one element
that prohibits them from qual
ifying as e
-
money. Even if a certain virtual currency scheme could be
considered as e
-
money, there are still the broad exceptions to the scope of application of both the
Payment Services Directive and the E
-
money Directive. By simply

providing an added val
ue to the
services provided, a service provider
could

exceed the intermediary requirement, thus evading the
application of the legal framework set by both directive
s
. Similarly, in
many

virtual currency schemes
it could be argued that the scheme is aimed a
t a ‘limited network’ of providers with a ‘limited range’
of goods or services, thus allowing

for

the application of the second major exception to the scope of
application of both directives.


As noted before, the limited scope of application of the Payme
nt Services Directive and the E
-
money
Directive could be defended from the perspective of preventing the creation of a legal framework
that would be too strict for many service providers in the realm of electronic commerce. In order to
foster growth in thi
s sector


including mobile payments


it can indeed be argued to be important to
allow for the creation of new services and business models.
141

However, as also noted, it is equally
important to ensure that the user can and will trust such new services and
business models in order
for them to be adopted.
142

And in order to foster more user trust, certainty regarding the legal
framework under which a particular scheme operates can be considered as one of the main elements
that need to be taken into account. The
refore, if the legal framework regarding a particular type of
service is unclear, this may lead to legal uncertainty
for

the user, which in turn could prevent this
user from using said service and thus leading to a loss of chance of economic growth.


The
question is then whether the current legal framework regarding virtual currency


which makes
the distinction between regulated e
-
money and unregulated virtual alternative currencies


can
suffice to foster

the

user
’s

legal
certainty in a particular mobile

wallet service platform.
This could be



141

Also the European Commission recognized this, finding in the e
valuation of the 2000 directive that “
some of
its provisions seem to have hindered the take
-
up of the electronic money market, hampering technological
innovation
”. The 2009 revision was therefore set out to remove such barriers, essentially by narrowing do
wn
the scope of application. European Commission, “proposal for a directive of the European Parliament and of
the Council of 9 October 2008 on the taking up, pursuit and prudential supervision of the business of electronic
money institutions, amending Dire
ctives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC”,
COM(2008)627 final
, 2. See also R. Halpin, R. Moore, “Developments in electronic money regulation


the
Electronic Money Directive: A better deal for e
-
money issuers?”,
Computer Law & Se
curity Review
(2009) 25,
564.

142

R. Weber, A. Darbellay, “Legal issues in mobile banking”,
Journal of Banking Regulation

(2010) 11, 139
-
140;
R. Halpin, R. Moore, “Developments in electronic money regulation


the Electronic Money Directive: A better
deal f
or e
-
money issuers?”,
Computer Law & Security Review
(2009) 25, 567.

24

/
28


considered to encompass two components. First,
it could be argued that
the minimum requirement
of a
possible

legal framework
in this field
is to inform the user whether the service used is covered by
the scope of tha
t legal framework. As noted, this can hardly be considered to be the case for the
Payment Services Directive and the E
-
money Directive as both directives were found to contain a
number of vague and unclear provisions. Since in a number of cases arguments c
ould be made both
for and against the application of this legal framework to a particular example of a mobile wallet
service platf
orm, it could be found that the

legal framework does not sufficiently clearly inform the
user on whether or not it is applicab
le to a particular mobile wallet service platform. Second, legal
certainty
for

the user may also be further fostered if it is clear to the user that a particular level of
protection is offered. This does seem to be the case for the legal framework set by t
he Payment
Services Directive and the E
-
money Directive as both directives impose a number of duties on the
providers of such services aimed protecting and informing the user. However, due to their unclear
scope of application, it is uncertain to the user
whether or not he will

be covered by this
protection.
143


It can therefore be found that the legal framework set by the Payment Services Directive and the E
-
money Directive can be considered as offering the user of the services covered by their scope an
appealing degree of protection and transparency. However, be
cause of the unclear scope of
application of both directives, the user is left with much legal uncertainty regarding whether or not
the services used are covered by that legal framework or not. Here, reference can be made to the
question formulated earlier

in this paper inquiring the threshold between regulated e
-
money and
unregulated virtual alternative currencies.


As found in the previous sections, this threshold is mainly
set by the definition of e
-
money under the
E
-
money Directive and the two main exc
eptions to the scope of application of both directives. The
question then becomes whether this threshold can be considered as sufficiently defined, as it forms
the line between more and less protection to the user and currently forms the root of the unclea
r
scope of application of both directives.


For instance, given the growing importance of mobile payments, the adoption of virtual currencies in
mobile wallet service platforms, the size of the virtual economies formed by virtual currencies and
the stakes

a user ma
y have in such schemes, should th
e applicability of the protection offered by the
E
-
money Directive be able to be avoided as easily as by
the mere way in which the scheme in which
the virtual currency operates has been construed?


Also the unclea
r formulation of the two major exceptions to the scope of application of both
directives may be questioned.
For instance, the exception relating to ‘limited networks’ of providers
regarding a ‘limited range’ of goods and services can be understood as exemp
ting virtual currency
schemes with a small impact from having to comply with the stricter requirements of the legal
framework set by this directive. While this can be supported from the point of view of not wanting to
put obligations on new and small marke
t players that are too onerous to carry, the terminology of
this provision allows for much broader schemes to fall under its scope as well. For instance, as
discussed before, the Apple App Store could be argued to be a ‘limited network’ as it operates in a

closed system maintained by Apple. Also, applications could be considered as a ‘limited range’ of
goods
, thus satisfying the exception. While this does not say anything about whether or not the legal
framework set by the Payment Services Directive and the

E
-
money Directive can be applicable to
such service on the basis of the other applicability requirements


for instance, the App Store
could

for other reasons not be qualified as an e
-
money scheme


it does serve to point out that the impact
of a scheme m
ay not suffice as the determining element between qualifying as regulated e
-
money or



143

Digital Policy Alliance, “Position Paper on the proposed review of the Payment Services Directive”,
dpalliance.org.uk
, January 2013, 4.

25

/
28


an unregulated virtual alternative currency, especially not when

this element is

insufficiently
demarcated.


Summarizing
, it can be found that there are three main element
s forming the threshold between
regulated e
-
money and unregulated virtual alternative currency. These elements are the definition of
e
-
money, the added value exception and the impact exception. For all three elements it can be found
that their scope is not

sufficiently defined and leaves room for discussion and uncertainty.
Therefore
,
these elements cannot suffice in maintaining this threshold and cannot provide the user with legal
certainty regarding the applicability of the legal framework set by both dir
ectives.


As a result, it can be argued that a new demarcating element should be established. Such element
should not focus on greatly expanding the overall scope of application of both directives, as
overregulation could hinder growth and development in t
his sector. A new demarcating element
should rather focus on including those services that pose a greater risk to the user, regardless of their
overall scope

and impact
.
Given the importance of mobile payments for economic growth, it can be
argued that mor
e attention is needed for a number of issues underlying the virtual economies
established
within

virtual currency schemes.
144

For instan
ce, as already noted by the EFF
145

and in the
discussion earlier in this paper
regarding Bitcoin, many questions remain
regarding a number of legal
issues

on this decentralized virtual currency
. Besides issues of non
-
redemption of the user’s
investments, lesser protection against financial disputes with the service provider


for instance in
case of the latter’s bankruptcy


and general user lock
-
in, virtual alternative currency schemes could
also raise questions regarding money laundering.
146



As the European Commission has already indicated its intention of strengthening legislation against
money laundering
147
, this path and
the upcoming review of both directives could be seen as an
opportunity to revise the demarcating element between regulated e
-
money and unregulated virtual
alternative currencies.

At the meetings of the Payments Committee


which assists the European
Commis
sion in drafting the implementing measures for the Payment Services Directive


it was made
clear by a number of Member States and the ECB that the application of
some much
-
debated

exceptions to the Payment Services Directive, and most notably the added va
lue exception (article
3(l)) and the ‘limited network’ exception (article 3(k)), had proven difficult.
148

Both exceptions were
noted to leave room for “
conflicting interpretation and abuse
” and allow service providers to tailor
their services in order to not

fall under the scope of the directive.
149

Given the many overlaps
between both directives, a merger between the Payment Services Directive and the E
-
money
Directive was p
roposed
150
, yet will be unlikely at this stage.
151

While the report called for in both
dire
ctives has not yet been released as of the moment of writing, the meetings of the Payments



144

Note, for instance, the virtual economy behind Bitcoin or platforms such as Second Life. Also games can
encompass a virtual economy, notably in Blizzard’s World of Warcraft and games by Zynga and Electronic Arts.

145

C. Cohn, “EFF and Bitcoin”,
eff.org
, 20

June 2011.

146

R. Grinberg, “Bitcoin: An Innovative Alternative Digital Currency”,
Hastings Sci. & Tech. L.J.

(2012) 4, 204
-
206; R. Stokes, “Virtual money laundering: the case of Bitcoin and the Linden dollar”,
Information &
Communications Technology Law

(
2012) 21, 221
-
236.

147

europa.eu/rapid/press
-
release_IP
-
13
-
87_en.htm
.

148

Payment Committee, “Summary Record of the Sixth meeting of the Payments Committee of 21 March
2012”,
ec.europa.eu
, PC/005/12, 3
-
4.

149

Id.

150

Payment Committee, “Summary Record of the Sev
enth meeting of the Payments Committee of 9 July 2012”,
ec.europa.eu
, PC/010/12, 2.

151

Payment Systems Market Expert Group, “Minutes of the meeting of 6 November 2012”,
ec.europa.eu
, 2012,
1
-
2. In this meeting, it was noted that a strict timeframe will be f
ollowed for the review of the Payment
Services Directive and that it would not be the right moment to revise the E
-
money Directive as it has only just
been fully transposed by all Member States.

26

/
28


Committee illustrate the concerns of the Member States regarding the unclear exceptions to the
scope of both directives. They also confirm the need for more clarity
regarding the application of this
legal framework, as well as the need for a more clearly defined demarcating element that can
establish the application or non
-
application of the legal framework on a particular mobile wallet or
virtual currency service.


6.

Conclusion


Reiterating what was already stated in the introduction of this paper, it can certainly be affirmed that
mobile payments are on the rise. Together with the general growth of e
-
commerce, mobile
payments are certain to be an important factor in
future economic growth. As these mobile
payments are generally conducted as part of a mobile wallet service, it can be found that such
services are on the rise as well. Given their potential for cross
-
border use, mobile wallets can even be
found to contrib
ute to the further development and achievement of the common single market
within the EU. Therefore, as also noticed by the European Commission, mobile payments require a
clear and comprehensive European

legal

framework in order to foster user trust in suc
h services and
to allow for growth.


However, the brief overview provided here of a select number of the many mobile wallet services
available on the global market at the moment of writing reveals that these services can be highly
divergent in terms of na
ture, scope and additional services offered. This makes it difficult to establish
a clear and well
-
defined typology of mobile wallet services for which such clear and comprehensive
European

legal

framework must be
established. Moreover, a mobile wallet ser
vice provider could
decide to adopt a virtual currency scheme within his service platform, which leads to even more
divergence in services. In general, a distinction can be made between the regulated e
-
money and
unregulated virtual alternative currencies.
The latter can be further divided in closed schemes,
unidirectional schemes and bidirectional schemes, depending on the extent in which the virtual
currency scheme interacts with real world economies and currencies. While a divergence of option
s

can be app
lauded as a way of the market to let the user decide upon the best schemes, it can also
lead to market fragmentation, user lock
-
in and further incompatibilities beyond the existing issues
regarding cross
-
border payment interoperability. This may, in turn,
lead to user distrust and
therefore a lack of user adoption. One way to foster user trust in mobile payments is to adopt a clear
legal framework that can provide the user with the necessary legal protection as well as with legal
certainty regarding its sco
pe.


The current legal framework, however, does not seem fit for that purpose.
While the Payment
Services Directive and the E
-
money Directive do offer a number of provisions aimed at protecting the
user of mobile payment services and virtual currency schem
es, the scope of application of these
directives can be found to be rather ambiguous. First of all, the definitions used in these directives
allow for broad interpretation, which can be assumed to be further aggravated in the different
national implementat
ions of these directives by the EU Member States. For instance, it was found
that the definition of e
-
money


as used under the E
-
money Directive


includes a number of terms
that are up for discussion. As a result, it
is difficult to

state with full legal

certainty whether or not the
E
-
money Directive can be applied to, for instance, a private decentralized peer
-
to
-
peer currency such
as Bitcoin.

But, as noted, even if such virtual currency would not fall under the scope of the E
-
money
Directive, practice h
as shown that lawmakers are still keen on imposing certain rules.

Second, both
directives include a few rather broad exceptions to their scope of application. A service provider can,
for instance, escape the scope of this legal framework by providing added

value services. In
doing so,
the service provider c
ould exceed the scope of services of a mere intermediary and thus

not

fall
under the directives’ scope of application. Also, the directives limit their scope to services that enjoy
a broader acceptance. L
imited schemes, such as most loyalty schemes, are exempt from their scope.
27

/
28


While understandable from the perspective of not wanting to ‘overregulate’ a young and growing
market and the many startups in this field, the phrasing of this exception is rather a
mbiguous. As the
directives do not apply to services aimed at a ‘limited network’ of service providers and offering a
‘limited range’ of goods or services, discussion can be held over how this notion of ‘limited’ should be
interpreted. In the case of the r
ising market of application stores, for instance, the generally closed
nature of such platform could be argued to be a ‘limited network’, with applications being a ‘limited
range’ of goods or services. However, considering the growth of what is already ref
erred to as the
‘app economy’, it can be questioned
whether such platforms should be able to benefit from this
broad scope
exception
, if they are found to provide payment services or to issue e
-
money
.
152



Indeed, when assessing whether the legal framework set by the Payment Services Directive and the
E
-
money Directive can be applied to the mobile wallet services and virtual currency schemes
discussed here, it was found that much uncertainty remains. For ins
tance, for many services and
schemes arguments can be made both for and against the application of the legal framework on such
services and schemes. In the case of PayPal, it was even found that this service provider explicitly
labels its service as fallin
g under the scope of the E
-
money Directive, while the European Central
Bank argues for the opposite. Such situations are of course detrimental to the legal certainty offered
by that legal framework to the user.


The broad scope of exceptions found in both

directives can even facilitate service providers to evade
the scope of application of this legal framework. For instance, providing added value services or
adopting a unidirectional virtual currency could already suffice to evade stricter regulation. From

the
point of vi
ew of user protection, this could lead to counterintuitive situations. It is, for instance, clear
that the legal framework set by the Payment Services Directive and the E
-
money Directive is only
applicable to services and platforms with a b
roader scope of acceptance. As noted, such was decided
to avoid application of this legal framework to small and limited schemes, such as loyalty cards. In
turn, the goal of both directives would be to apply to services and platforms that enjoy acceptance
beyond the realm controlled by their service provider, including smaller schemes that first evaded
their scope but have now grown to fall under that scope. However, the current state of the scope
exceptions seems to allow a great number of rather broad ser
vices and platforms


such as the
aforementioned application stores


to
take benefit from such scope exceptions while not quite
being limited at all

in terms of revenue and user adoption
. These uncertainties and ambiguities make
it very difficult for the
user to clearly establish whether or not a particular service or platform is
covered by the scope of these two directives.


Given the rising value of a number of services


such as application stores


and virtual currency
schemes


such as Bitcoin, but also virtual economies in games and applications


it can be argued
that the users of such services and platforms require addi
tional protection of their investments. The
current legal framework, however, seems to ignore precisely this group.
It can therefore be argued
that a more comprehensive approach is needed. The scope limitation of the current legal framework


currently
mai
nly
aimed at defining the breath of services in terms of ‘limited networks’ and ‘limited
ranges’


cannot suffice as a demarcating element between regulated e
-
money and unregulated
virtual alternative currencies. A new approach should therefore not so much

focus on expanding its
scope


as growth in this sector should not be discouraged


but on establishing another element of
demarcation, better suited at including the services and platforms that pose particular risk to the



152

A common question regarding applicability of this legal framework is whether or not the platform provider
directly receives payment. However, in most cases, this will be unclear to the user. Moreover, given the broad
scope of services offered on such plat
forms,
it could be argued that the services covered in this framework
have broadened and that
increased consumer protection may be expected

for a more expanded range of
services
.
Bond Pearce, “Review of payment services (and e
-
money) requirements
-

a devel
opment to watch…”,
bondpearce.com
, 3 April 2013.

28

/
28


user’s investments and thus at p
roviding the legal certainty the user needs in order to raise his trust
in such services and platforms.
This can be considered as imperative for future and sustained growth
in this sector.

The upcoming review of both directives and the European Commission’
s commitment
to expand anti
-
money laundering legislation could serve as opportunities to this end.


Acknowledgment

The research leading up to the results reported here was conducted within the framework of t
he
iMinds
CoMobile project,
a

research project c
o
-funded by iMinds
,

a

research institute founded by the
Flemish Government. Companies involved in the

project are
City Live,
Massive Media
, Alcatel Lucent,
Cardwise,
Clear2Pay and BDMA
, with project support of IWT
.


Short bio

Niels Vandezande

is a legal re
searcher at the Interdisciplinary Centre for law & ICT (ICRI), Faculty of
Law, KU Leuven. In this capacity he is also connected to the Flemish research center iMinds. He
conducts research
in several

Flemish
-

and EU
-
funded projects, focusing on issues of tr
ust & security,
mobile transactions and data protection. He obtained his Master of Laws degree at KU Leuven,
where he currently also conducts his PhD research.