Mobile Money Regulation: Kenya, Ecuador and Brazil
Octavio Groppa and Fernando Curi
Universidad Católica Argentina
Regulations concerning digital payment systems, including mobile money, are being discussed in Latin
American countries at the moment. The need to develop a legal framework comes from three main
sources: first, there is great concern about the financial risk connected to these kind of operations; second,
the need to control the compliance of regulations regarding money laundering and terrorism financing;
last, the need to protect consumers from fraud on behalf of the system administration and also the need to
protect personal private data. We describe hereby, the main features of mobile payment systems in
Ecuador and Brazil, comparing them with the successful experience in Kenya. While Kenya opted for a
light regulation which helps to promote the expansion of m-payments in a non-banking framework,
Ecuador chose a State-controlled framework, while Brazil is defining its mobile money system within the
banking system. Finally, we show some hints for debate, with a comparison between cash, e-money and
JEL: E58, G21, G8
Over the last decade, digital payment systems have rapidly developed quantitatively and
qualitatively, becoming a reality in both developed and developing countries. These new
technologies create new threats and opportunities, requiring regulators to create relevant
frameworks. A definite novelty is the appearance of new actors in payments systems,
such as telecommunication companies. It also deserves highlighting the incorporation to
the market of millions of people who developed their lives completely outside of the
banking system, which may result in an improvement in income distribution (Taranzi
and Breloff 2010). In this context, some regulators may take a defensive stance
regarding potential risks, and yield strict norms and definitions, while others may take a
more permissive attitude in order to avoid hindering potential innovations, estimating
the benefits more than the eventual prejudices.
The matter of emission and backing in digital payment systems is addressed in Cenev
We thank comments and suggestions received from Camilo Ramada (peer-reviewer) and Henk Van
Arkel. Errors and omissions are authors’ responsibility.
et. al. (2012), showing that many forms of agreements may be chosen to settle the
payment of a commercial transactions. M-Pesa in Kenya may be the most documented
example of how a commercial private agreement (airtime) became a means of payment.
But any form of commercial “IOU” may start circulating in trade transactions, as long
as users keep faith in that promise of future goods or services.
Besides, some currencies are implemented through Internet. Internet is, by its very
nature, global. Users can, hence, access services that are offered from outside the
jurisdiction in which they operate. There is no technical barrier for a user to open a
digital account in a system hosted in a foreign country, and transfer values through
digital communication to another user, standing right next to him, that also holds an
account in that foreign system (King 1998, Friedman 1999). In consequence, digital
money may not be constrained to any local area.
These issues pose a lot of questions for regulators, such as whether a digital payment
system may just fall under existing law, whether it can be considered money at all, or
how to regulate systems that operate outside of their jurisdiction.
Anyhow, the introduction to the market of mobile money in latest times sets up an
innovation without precedents in the monetary system, which will probably make a
qualitative leap in the organization of exchanges and, thus, in our everyday life. The
novelty lies not only in the most tangible aspects of the implementation of a currency
with this characteristics (utility, security, celerity), but in the fact that it has the potential
to change the very structure of monetary system.
In order to avoid misunderstandings, it may be useful to clear up from the start how
some key concepts are understood in this paper. First of all, money; it is conceived by its
main function of means of payment and, so, it is equal to having a credit balance, or a
right over goods and services offered in the market. Cash is, obviously, national paper
money. Digital currency or e-money is a computer-based deployment of money or
payments system. In the same way, mobile money is a means of payment consisting in
airtime transfers. It is quiet another thing, then, that mobile access to bank accounts
(national e-money accessed through mobile technology): their impact on the economy
are different in each case. A complementary currency is any other currency which is not
issued by central banks, that is, which is not legal tender or national currency. Since
being digital, mobile, paper, or metallic is a matter of operationalization, those
representations could be used by any kind of currency, legal or alternative. Therefore, if
digital money (issued outside banking system) or mobile credits are transferred within a
network without converting them in national currency, they conform an alter-market,
and so they are a kind of complementary currency. When this market is structured
within national currency market, then it will be a submarket. In contrast, if that money
transcends national boundaries, then it will be configured a parallel market.
Given that in Latin-America discussions concerning implementation and regulation of
mobile payment systems (MPS) are just in their outset, the main objective of this paper
is to develop a comparative study of how these systems are being performed in two
selected countries: Ecuador, where there is an already settled regulation, and Brazil,
who has the widest e-money network in the continent and is defining its regulation on
this issue. The objective is to oppose (and open to discussion) different regulatory
models. We will take the case of Kenya as point of comparison, because it constitutes a
successful experience and has a longer history. Characteristics and regulations of other
African and Asiatic countries can be looked up in UNCTAD (2012).
The article starts summarizing the benefits and risks of mobile payment systems (MPS).
Following, the operational characteristics, as well as regulations, of mobile money in
the three countries are described. Last, some conceptual or theoretical issues are settled,
derived from questions generated from the revised experiences.
BENEFITS AND RISKS
Benefits of mobile money
Mobile money, as known, was born in the area of telecommunication companies from
the possibility of transferring telephone credits (airtime) from one phone to another.
What started being a cheap procedure to make transfers between people, went on
creating an enormous market parallel to the banking system. This new market has the
remarkable feature that it includes poor laborers and people situated at the bottom of the
social pyramid (like in Kenya, Filipinas, Uganda and Tanzania, between others;
The success of the system is mainly due to the fact that is a win-win situation:
companies are favoured with the commissions charged for SMS transferences; banks,
with costs saving and the incorporation of new clients; users, by the reduction of
One of the most significant characteristics may be the incorporation, as main actor in
the process, of telecommunication companies. This fact gives birth to important issues
that regulation frameworks intend to solve.
The Financial Deloitte Centre (Deloitte 2012) report on the perspectives of mobile
banking in Latin America, summarizes the main benefits for the actors of MPS.
New clients with greater
Greater fees due to
the growth of
Increase of transaction
volumes at sales spots.
Additional opportunities to
increase sales, taking into
advantage a more extensive
data from clients.
of data and
New clients from
services and products
High cost channels of
interaction with the client
(such as branches or
telephonic attention centres)
transactions and of
fraud risk due to
Transaction costs are
reduced due to the
increase of the
Channels for client segments
Client´s satisfaction can be
increased due to a more
convenient access to
of the promise of
due to better products
Better knowledge and use of
Concerning users, it can be added the greater safety in the use of electronic money
(while the encrypting processes are efficient), for it reduces money transportation and
exposition to theft.
Governments could also be interested in the development of mobile payments for its
setting up could considerably reduce costs, in relation to the needs of cash required for
transfers, including time spent by poor people in travelling to payment spots, long
queuing, cash withdrawal, ID controls at every payment operation, recordkeeping, and
Risks of MPS
MPS, however, are not exempt of risks. According to Ashta (2012), mobile banking
gathers both the risks of the telecommunication system as well as the banking system´s.
For instance, a wrong dialled number means money sent that should be returned before
the wrong recipient spends it.
Likewise, the system could also be object of money laundering, terrorist financing or
any other illegal businesses, by the multiplication of small transactions aiming to
conceal great fund movements. On the one hand, the origin and destiny of payments
cannot always be traced without invasion of privacy. On the other hand, transactions
take place in real time and can be completed and closed before the bank or
telecommunication operator adjusts to any anti money laundering (AML) or countering
financing of terrorism (CFT) regulations.
Another fact that increases the risks of mobile bank is the lack of interoperability
between different operators. The same author states that each operator may be content
with supervising its own users. In like manner, GCASH and SMART in Philippines
prefer limiting their services to the people in their own network. Nevertheless, when the
system is based in the interoperability of the payments between operators, as it is the
case of Wizzit in South Africa, new opportunities arise, but also risks multiply, making
necessary the existence of supervising authorities. The risk here is the non-cooperation
between brokers in order to build a wide base interoperable net.
A great portion of these risks depend on the ability of governments to enforce financial
service regulations and supervision to mobile bankers. Having seen the important
benefits that may come from this innovation, any regulation may enable its expansion,
providing, on the one side, safety to the brokers who invest venture capital, and on the
other hand, confidence to consumers so that they deposit their funds with the mobile
SOME INTERNATIONAL EXPERIENCES: KENYA, ECUADOR AND BRAZIL
We dedicate this section to delineate the aforementioned cases: Kenya, Ecuador and
Brazil. We outline the main features of the system and their normative aspects.
General features of M-PESA
The most successful MPS worldwide is M-PESA. It was carried on from the initiative
of a mobile net operator. Companies involved are Vodafone, a telecommunication
services provider, and Safaricom (40% property of Vodafone), which offers the mobile
Launched as pilot in 2005, it was set up in 2007 at national level. In August 2011 there
existed more than 13 million of users. While financial institutions have 876 subsidiaries
and 1,424 ATMs in Kenya, M-PESA has a system of 37,000 agents or non-banking
operators in the whole country, and it is thus the easier way for people to access to
financial services (UNCTAD 2012).
M-PESA offers a wide variety of money services: cash in/out, balance queries, bill
payments and balance transfers to other user via mobile phone. In this way, it has found
a business opportunity, by facilitating financial transactions through a services platform
for mobile phone.
The profit of this new business model in the chain customer-user, fundraising agent,
network manager (M-PESA), and mobile operator is performed by a fee per transaction.
Before the launch of M-PESA in Kenya, Safaricom requested authorization from the
Central Bank to provide the service of money transference. The Department of
Supervision of Financial Entities evaluated if M-PESA provoked either an increase or a
break-up of banking business regulations. At the same time, the office responsible of the
National Payment System evaluated the integrity, efficacy, efficiency and security of M-
PESA as provider of the payment service. Another aspect taken into consideration was
the telecommunication regulation, which requires that telecommunication operators
should only offer the services listed in their license. That is why it was included in the
licenses that the main regulator of mobile banking activities provided by a mobile net
operator should be the banking regulator (Sultana 2009).
In the deployment of the system, it was considered that this rule did not conflict with the
Bank Act. It was stated that electronic money issue would be responsibility of M-PESA
Trust Company Limited. Therefore, the system operates as follows: money resulting
from the purchase of airtime is deposited in an account administered by a holding
created by Vodacom and Safaricom. Consequently, funds remain as clients’ property and
Mainly based on UNCTAD (2012); Tarazi and Breloff (2010); William and Tavnnet (2010) y Sultana
the Central Bank of Kenya only controls the performance of the system. Thus, the M-
PESA fund remains in an account in the Commercial Bank of Africa, who directly
administers it on behalf of the holding created, and is not directly related with each M-
PESA client (UNCTAD 2012). Accrued interests from this account cannot be registered
as Safaricom profits nor can Vodafone invest the funds deposited in the electronic
wallets of M-PESA. In the same sense, Safaricom is not allowed to turn into a financial
institution to take in deposits. Customers’ claims against M-PESA Trust Company due
to negligence or wilful misconduct are covered by Safaricom (Tarazi and Berloff 2010).
Regarding transactions, maximum limits to account credits (around USD 750) and to
transaction amounts (USD 350) are imposed. This permits the Central Bank of Kenya to
set a limit to the risk of insolvency on the part of customers, blocking at the same time
money laundering operations.
People interested in using the service must sign up with an authorized M-PESA broker,
presenting their ID. The agent gives them a new SIM card, where it is loaded the M-
PESA mobile wallet app. Then, they get an electronic money account or code. The
capacity of making deposits and use the money is managed by M-PESA service spots.
The customer or user sends an SMS from his mobile equipment and then he receives the
confirmation of the process. Transactions are made in real time and SMS confirmations
of the transaction are received by both the sender and the receiver. Besides, the system
has a back-office application which traces and records each transaction. M-PESA
platform has all the securities related to AML/CFT practices. Moreover, the
development of a net of agents has not only simplified its access to people, but also has
promoted the creation of entrepreneurship around this business (UNCTAD 2012).
In sum, M-PESA is a reliable system, secure and easy to operate and it has had a
transformative effect in the quality of life of Kenyans. Technology has not been the
factor of success but, mainly, its adoption by users, especially those situated at the
bottom of the social pyramid. As it follows, MPS in Kenya has been implemented on a
Ecuador is the only South American country with a defined legislation with respect to
mobile payments. In this case, the main characteristic is the concentration of control in
the Central Bank of Ecuador (CBE). This bank has several faculties that allow it to
wholly take part in the development of the system.
The system works, just as in the Kenya case, by means of non-banking agents (NBA),
distributed in cities and settlements. The existence of agents was set as a way of
mediating between banks and clients. Natural or legal persons can be NBA. They
represent a financial service centre within the low income or faraway populations
(Méndez Prado 2011). They operate in real time via on line data transmission systems.
Through these centres, customers can make the usual operations developed by ATM,
such as money withdrawal, deposits, transferences, queries for financial products, credit
reception, bills payment, etc. To perform all these operations the agent receives a
commission, previously agreed with the bank.
The enactment of the NBAs has made possible to increase the number of bank
operations. Banks have widened their geographic coverage, increased the number of
clients, and thus, the amount of money placed as microcredits for people who could
hardly have access otherwise (Méndez Prado 2010).
Ecuador has a poor population estimated on one third of the total, but it reaches a half in
rural areas. Besides, it has total mobile telephone coverage and remittances that come
up to an 8% of GDP (2008). These characteristics make the country a fertile soil for the
growing of MPS.
The high concentration of the banking market led the CBE to take the initiative and
develop a restrictive regulation on the matter, turning Ecuador into the first Latin
American country who regulates MPS and electronic money issue.
From the legal point of view, Vazquez (2011) mentions that the National Constitution, in
its article 302, reads that the monetary, credit, exchange and financial policies –which
include the regulation of money supply– are an exclusive faculty of the President of the
Nation (implemented by the CBE). The CBE states in Resolution 017/2011 that the
issuance of mobile money is an exclusive function of the State. It defines electronic
money as a public good and takes mobile money as a kind of electronic money:
The electronic money is the monetary value equal to the value expressed in the country’s
a) It is stocked and exchanged by means of electronic or mobile devices;
b) It is accepted with legal tender and recognized as means of payment by all the economic
agents in Ecuador;
c) It is convertible to par value and no discounts will be applied except for the expenses
that are strictly necessary in order to carry on the operation; and,
d) It is issued by the Central Bank of Ecuador, and thus, it is registered as a liability of the
institution (Resolution 017/2011).
Besides, this regulation tends to favour the participation of the Saving and Credit
“which will be able to adhere a global transaction system from
which they have been kept aside due to limitations of investment, access and coverage”
(Méndez Prado 2011).
The State will also ensure the interoperability of the system, so that m-money could be
widely accepted through the whole country.
Apart from mobile money law, there is also the Popular and Solidary Economy and of
Popular and Solidary Financial Sector Act, regulated by Presidential Decree n°
1061/2012. The law and its regulatory decree set the conditions for the sector, which
includes cooperatives and mutuals. In its article 132, par. 6, it allows organizations
Article 7 of the Regulation of the Organic Law of Popular and Solidarity Economy, points out the
requirements for the constitution of saving and credit cooperatives: a minimum of 50 members and an
initial capital equal to two hundred unified basic salaries.
which conform Popular and Solidary Economy to use complementary means of
payments. Thus, organizations of the Popular and Solidary Financial Sector are
excluded (art. 135 of the Regulatory Decree). This sector is conformed by saving and
credit cooperatives, associative or solidary entities, community banks and saving
institutions (art. 78). Complementary currencies can only be used within the
geographical area where the community association has its address.
Art. 135. The usage of complementary means of payment will be made exclusively within
organizations not belonging to Popular and Solidary Financial Sector.
Complementary payment methods do not have settlement power, therefore, may not
generate financial returns, nor be used for credit operations, guarantees, or be subject of
deposits in financial entities, since they are not legal tender, because they are restricted to
the geographical location of the organization's community.
The restriction of usage of complementary currencies to non-financial organizations is
understandable, because they are the only ones who do not do financial intermediation.
However, the geographical restriction to the validity of complementary currencies
issued by non financial organizations sets a strong limit to the development of a m-
money private network. The innovation introduced by mobile technology in payment
system, or even by digital currencies or barter systems implemented through Internet,
may be severely hindered.
Lastly, it is important to highlight once more that the economy of Ecuador is dollarized,
being then a singular case. Ecuador’s government may be preparing the conditions to
issue its own money. Anyway, the sole control of m-money won’t permit Ecuadorian
government to do monetary policy freely while still exists any kind of convertibility
with the dollar.
On the other hand, convertibility guaranteed by the State can help citizens increase their
trust in the system and multiply its usage. Nevertheless, there are still doubts about
whether the chances of creating a money that suits the local economy needs are not
being lost with this State-centered scheme.
Brazil has no specific legislation about mobile money yet. Notwithstanding, given the
huge market created by the incorporation of millions of people with the “Bolsa Familia”
(Family Purse) program in 2003, commercial banks are developing partnerships with
telecommunication companies to deploy the mobile payment system. In this context,
mobile money could be a factor that empowers the impact of social policies on local
development. Therefore, we present the overall situation of e-money in Brazil, which
will be the structure over which m-money may develop. Current situation reveals how
different actors are positioning themselves in this emerging business.
The “Brasil Sem Miseria” plan (“Brazil without Misery”, launched in June 2011), an
extension of Bolsa Família, has among its objectives both the productive and financial
incorporation of the benefited. In 2003, more than 10 million accounts were created at
the “Caixa Economica Federal”, destined to draw the profit. Almost 7 million are still
That same year, the work of non-banking agents was ruled. They provide services such
as opening of accounts, deposits, withdrawals, bill and loans payments (International
Finance Corporation 2011). As in Kenya and Ecuador, these agents act as facilitators
who ensure the effectiveness of the system. In many poor populations in Brazil, for
example in the rural North, there is a cultural fear to get into banks. Nonetheless, they
are accustomed to make diligences at the post office. That is why this institution often
acts as intermediary.
The incorporation of many people to financial system was aided by the fact that a big
portion of the market is covered by public banks, such as Caixa Economica Federal,
Banco Nordeste, Brazilian Bank of Development (BNDES), and a mixed one as Banco
At the same time, Brazilian Government has stimulated the microfinance sector:
· In 2005, it launched the National Program for Productive Microcredits, which
forces commercial banks to allocate at least 2% of the deposits to microcredits.
· It has reinforced the cooperative credits, which represent 5% of the total credits
and are important for the development of rural areas.
· It has incorporated the credit societies for microenterprises to the national
Limitations of Brazilian banking network
Despite these efforts of Brazilian state, the banked population ratio is still low, about
44% (albeit the greatest between MERCOSUR countries). The MERCOSUR
Macroeconomic Monitoring Group states that Brazil has many aspects to work in so as
to gain ratios of banked population that equal those of developed countries (GMM
The vertical structure adopted in Brazil implies an obstacle for an open and efficient
performance of electronic banking. To this respect, each bank develops and operates its
own ATM network. As exceptions to the rule, “Rede24Horas” and “Rede Verde e
Amarela” offer access to any institution, with the condition that it complies with
technical requirements and security criteria. As a consequence, users keep accounts in
several banks. On the other hand, it forces the multiplication of controls, because
payments are transferred to different banks. It should be added that several clearing and
settlement systems exist. This situation implies greater transaction costs and higher
complexity of the system.
It must be pointed out that the Central Bank of Brazil denied mobile phone operators the
possibility of setting a system by which it was possible to change minutes by money at
retail. Besides, institutions responsible of regulating communications have allowed the
creation of mobile virtual operator networks, opening new opportunities for banks to
buy wholesale minutes from cell phone operators, and to sell them to their clients at
retail prices. Regulations, thus, are oriented to develop a mobile payment system within
the banking system framework, restraining the telecommunication companies´ scope.
In this context, Diniz et. al. (2011) state that the “Câmara Interbancária de Pagamentos”
(Chamber of Interbank Payment), owned by the main banks of the country, has great
possibilities of becoming the institution responsible of granting MPS in Brazil. From a
strategic point of view, that institution could represent the solution that would enable
banks to process any type of mobile payment. Notwithstanding, the CIP is not directly
related to any mobile operator. If banks turn to be mobile telephone service providers,
the rules to create mobile payment facilities should be changed (Diniz et. al. 2011).
In relation to private business, according to members of the industry, the main barrier
they have to cope with in order to get means of payment is the high cost of joining and
operating within card networks. This is especially true for small institutions which do
not have a great volume of transactions (International Finance Corporation 2011, 18).
Regarding tax system, it is important for our topic the tax over financial transactions, as
well as others that charge telecommunication services. The net effect produced by those
levies upon the development of mobile payments will depend on the effective rates paid
in each case. For, on the one side, MPS will help to elude the financial transactions tax;
but on the other side, payments will be reached by those taxes that are due on
Another important aspect to consider is current regulation on telecommunications. In
this sense, the regulation agency (ANATEL) must grant its approval to every value
added service offered on telecommunication networks.
Despite the fact that technological capability is available, the habit of making payments
with airtime does not exist yet. An important difficulty in this sense is the fact that fees
per minute are not standardized: they vary depending on the contract or the operators;
they also diverge according to marketing promotions. This situation implies important
additional transaction costs for the acceptance of airtime as a means of payment,
because it highly complicates calculations of real prices per minute.
Institutional positioning regarding m-payments
In order to boost the development of MPS, the Ministry of Social Development and
Fight Against Hunger of Brazil (MDS) has given some first steps towards the
implementation of mobile payments. He has announced three formal bids, supported by
the United Nations Development Program (PNUD) that attracted academics and
consultants (Diniz et. al. 2012).
In the corporate sector, Fundación Telefónica (2009) mentions that in early 2008 mobile
operator Oi launched in the states of Rio de Janeiro, Bahia and Minas Gerais the first
mobile payment experience without bank account. Payments made by clients are
deducted from their monthly bills.
The Minister of Telecommunications, Pedro Bernardo, stated at an editorial published by “O Estado de
Sao Paulo”, on May 25th 2012, that the tax burden on the sector reaches the 42,16% of companies´ net
income. The most important taxes are the Goods and Services Tax (its rate varies according to each State),
the Contribution to the Social Security Financing (3% of the gross profit of the companies), the
Universalization Fund of the Telecommunication Services (1%), and the Fund for the Technologic
Development of Communications (0,5%).
Moreover, in 2010, the Banco do Brazil bought a portion of “Cielo” –leader credit and
debit cards operator and shared with the private bank Bradesco, and signed an
agreement with the biggest telecommunication company, “Tele Norte Leste”
(headquarters of Oi Paggo). That agreement had the intention of setting a business
relationship for both credit and prepayment cards, and also working with Oi en the
expansion of m-payments.
The Banco do Brasil also holds a share of 50% in a new company named Paggo
Soluçoes. The other 50% is in the hands of a subsidiary of Oi, Paggo Adquirente. Pago
Soluçoes plans carrying on activities related to the capture, transmission, processing and
payment of all business, through the existent network between Cielo and Paggo
Adquirente, using m-payment technology. At the same time, it projects to make the
network grow in the whole Brazil (International Finance Corporation 2011, 29-33).
Some draft regulations on complementary currencies
In parallel, some regulations for the definition of a solidary financial sector are being
discussed. They may be of interest, insofar m-money can be considered as a
complementary currency, as it was stated.
Two draft laws have been archived in 2003 and 2007, respectively. Anyway, the second
one (n° 93) was reopened in 2011. In its art. 10 it reads that popular banks will be
allowed to “operate social currencies with circulation restricted to their operative area”
(Vasconcelos Freire 2011, 75), a similar restriction to that verified in Ecuadorian Act.
Proceeding from these definitions, probably two kind of complementary currencies will
be determined in Brazil: those restricted to a local area, like the known social or local
currencies, ruled by a solidary economy law, and mobile money, which has an
unrestricted geographical scope and would be regulated by Bank Act.
In sum, MPS is taking its first decisive steps in Brazil. While Central Bank has not yet
taken its stand on the issue, it seems to be leaving some room for the development of the
business with the participation of banks in consortium with telecommunication
companies. Regulations provided for and the different positioning of the actors involved
in the process tend to assimilate it within the banking system.
REFLECTIONS ABOUT REGULATIONS OVER MPS
As it was mentioned in the introduction, different regulation designs regarding mobile
money may be deployed. Each of them will yield a different kind and scope of
development of MPS networks.
Issues to be considered when defining regulations
There are a number of issues that should be included in any regulatory framework,
which require different instruments. Mas and Kumar (2008) consider that, to be
effective, regulations should consider the following issues:
Several countries set rates, limits or quotas on these operations.
Such restrictions on retailers play an important role in determining the way retailers
can use bank networks, and who will be the distribution operators.
· Know Your Customer (KYC):
By KYC regulations, it is intended to reduce financial
risk of illegal activities and the action of front men. Banks should have their clients
records updated and the operations they perform.
· Electronic Bank:
Transactional channels must have levels of security that include
the preservation of the client´s privacy, the possibility of answering client´s claims,
and other regulations regarding consumer protection.
Regulations must consider whether money is issued by banking or non-
banking institutions (like M-Pesa
, in Kenya, or G-Cash, in Philippines). Banks can
take this as direct competence and weaken their support to mobile banking. On the
other side, regulations can also allow banks to administer the mobile money
operators´ accounts and thus simplify their implementation (as it is the case of
SmartMoney in Philippines or MTN Banking in South Africa; Brazilian model is
moving in this direction).
Special taxes on communication services may restrict the incorporation of
clients, as well as the use of these networks.
As a provisional summary, it is possible to recognize three main areas of concerns to be
ruled: a) those which aim at supervising the money market, and preventing any type of
adverse systemic effect; b) those related to anti money laundering norms and control of
financing terrorist or other illegal activities (AML/CFT); and c) those which aim to
protect consumer privacy and defend them from eventual frauds.
While the first is an exclusive function of central banks, the second one depends on the
financial information/intelligence units in coordination with them. The third type of
regulation depends mainly on consumer protection agencies.
Certainly, MPS cannot step aside the two last types of regulations. Though many CCS
forbid exchanging local currency for national money, such prohibitions may be quite
difficult to control, insofar that people may tend to arbitrage if they see there is a benefit
in operating in one currency over the other. For that reason, such monies should indeed
be controlled by AML/CFT regulations, since anyone could enter any amount of money
in a local currency system as capital asset in order to back up new money issues and
then do a cashing out operation. In that case, the result will not only be the incorporation
of potential laundered money into national money market, but also the shock or collapse
of the alternative currency submarket due to a sudden drainage of means of payment.
However, some questions arise with respect to the first type of regulation. They will be
addressed in the following section.
Monetary risks to be avoided: a conceptual approach
We will, then, focus in the type of control needed related to money issuance or to the
possibility of any type of adverse systemic effect.
First risk: inflation in complementary currency
Regarding the first topic, the main threat is the generation of inflation or, much worse,
hyperinflation in complementary currency. This could happen because of
mismanagement in the process of credit issuing, typically due to the lack of required
controls. In this sense, it is well known the crisis of the Club del Trueque, in Argentina.
Therefore, at least some regulations or recommendations on prudential issuance could
In a local currency system this problem may be not compelling, since exchanges are
restricted to mutual credit. When mutual credit is strict, credits assigned to members are
not too large (for example, not higher than two or three months of their personal
revenues, as proposes Greco [2001, 201]), and insofar the number of members is not
huge, open balances do not grow systematically, so that they cannot generate a
systematic increment of general prices level.
The problem is different when credits issued amount to several times monthly revenues.
This situation is more common when the network is mainly conformed by companies
that seek loans for investment or working capital. In this case, the constitution of a
reserve in national currency supporting complementary currency may be a safeguard
against any systematic over-issuance. In any case, to avoid the risk of inflation
administrators should try to promote mutual credit (so that open balances are
minimized) before issuing new money (for example, rewarding mutual loans with an
interest, or charging credit balances with a fee –demurrage).
In none of these examples, however, is there financial intermediation. As a
consequence, it is not necessary that complementary currencies are overseen by central
banks, but they could be supervised by other offices.
Second risk: systemic risk spread on national currency
Perhaps one of the most pressing fears of regulators is the possibility of a systemic
effect that affects negatively national currency (see, for example, ECB 2012). In order
to assess this possibility, the nature of the relationship between m-money, e-money and
cash should be analyzed. Four cases will be considered. On the chart below, two
categories are distinguished regarding issuance: on the one side, whether money is
issued on a legal tender basis or within any other subsystem of limited scope (quasi-
money); on the other side, whether administrators or issuers have the ability of creating
inside money (either on national currency or alternative means of payment).
Legal tender a b
There is no difficulty in recognizing that money issuers which effectively do financial
intermediation in a system using legal tender are, actually, financial entities, and
consequently reached by all regulations that rule this sector (case a).
Conclusions are note so obvious, however, in the remainder cases. Case b is the
example of a saving circle, where savings of each person are transferred to others. Since
national currency can only be issued (as outside money) by the central bank, there
cannot be new money. As an exchange between individuals, it is a private concern, and
so not covered by bank regulations or overseen by Central Bank. They should be
covered by other type of regulations, such as those which rule mutual institutions and
With respect to alternative or complementary currencies, including mobile money, case
c is quiet abstract. Insofar as money issuance is decided by the community network or
their administrators, there is no need to resort on a fractional reserve-based emission,
with the insolvency risk that it involves. Dropped legal monopoly, currency changes
from being a public good to a common good.
Finally, in case d, as in case b, there is no mandatory reason why the Central Bank
should oversee these activities, insofar issuers are not banks nor any other type of
financial entity. They are some kind of barter system –which is a free activity. Thus,
they should not be regulated as financial entities (like in Ecuadorian act). It must not be
forgotten that an accounting exchange system (provided it operates as a strict mutual
credit system) as pointed out by Fama (1980), cannot generate a solvency crisis, even
less a financial systemic risk.
In this sense, it is illustrative the experience with Banco Palmas, in Fortaleza, Brazil.
Banco Palmas, a complementary currency bank, was denounced for contravention of
Brazilian Penal Code, for issuing notes without legal permission. The process ended
with the acquittal Banco Palmas’ creator. The judge considered that the complementary
currency did not contravene Penal code, since it was not a promise to pay the bearer in
cash, but could only be used as a “bonus” in the purchase of goods and services within
the community of Conjunto Palmeiras (Vasconcelos Freire 2011, 81-82).
Nevertheless, this situation does not preclude from exerting any type of control
regarding the possibility of over-issuing of money within the network by other
government agencies (analyzed in previous section), primarily if complementary
currency is not supported by a legal tender reserve. Anyway, the most interested people
in avoiding this risk will be the proper network members and administrators. Thus,
some control of the self-regulation exerted by administrators on behalf of network
members may be defined in the required procedures to form a society destined to the
issuance of a complementary currency (again, such as those which rule cooperatives or
In sum, in our opinion, the difference between national e-money and m-money lies in
the ease each kind of currency has to become a deposit in national currency in a bank
account. As was pointed out in the introduction, a currency with restricted circulation
makes a restricted submarket. Therefore, the possibility of re-entering private money
into national currency market defines the degree of autonomy of the submarket by it
created. The less the ease, the more the isolation of that submarket. The membrane
which allows or hinders “osmosis” between both markets is constituted by the
regulations that rule each of them. Besides, once an alternative means of payment has
passed into a bank account, it becomes part of the monetary circuit and it is susceptible
of being passed to others as (new) inside money, through the secondary issuance
mechanism (see Groppa 2012). This is a real difference between national e-money and
m-money. The first one never goes out of the official money circuit. It can be directly
transformed into new credit. The link between e-money and banking system is, thus,
direct and fluent. In other words, anyone can convert from cash to e-money without
restrictions, and vice versa. Cash and e-money are but two different representations of
The situation is different when communication between means of payment and banking
system is not direct and overt, but is object of any kind of restriction (such as fees,
discounts, quotas, or any burocratic or technological procedure). For example, MPS in
Kenya began imposing a fee on conversion from m-money to cash (cash out), and vice
versa (cash in). However, with growing economies of scale and greater competition,
Kenyan companies began to offer that service for free. It is expected that digital
currencies issued by private companies act in this way. On the other hand,
complementary currencies which seek the creation of a partially protected submarket in
order to maximize internal labor, would hardly adopt a strategy of taxing cash in, but
would be keen to charge cashing out operations. In this sense, m-money can be taken as
a sort of complementary currency. The difference is a matter of degree.
In conclusion, if societies dedicated to complementary currency issuance are
prudentially regulated (legal constitution of representative bodies, compliance of
assemblies’ procedures, etc.), and issuance procedures are overseen or audited by any
regulatory agency (like a consumer protection agency), the possibility of any systemic
risk is hardly able to be verified. In contrast, the case of complementary currencies
created by private companies (such as Facebook, Bitcoin or other digital currencies)
may have a higher risk, insofar their goal is different as well as member involvement.
Supervision should be done in a closer way in this cases, especially if convertibility is
unrestricted and the network aggregate turnover is large (ECB 2012).
The introduction of the mobile technology into the payment system has demanded
regulations on behalf of the states. Latin America, except for Ecuador, is outlining its
regulation framework. This innovation is not only a matter of technology; it also implies
the incorporation of new actors in the monetary system, such as telecommunication
companies. Hence, different types of regulatory frameworks may be defined, ranging
from bank-based (and even State-based) to non-bank based models.
This situation leaves at least three bare areas that should be covered by regulation. First,
the financial system and the possibility that this innovation can host some type of risk.
Second, money laundering and terrorist financing. Last, consumers’ protection against
eventual frauds. In this paper we have focused on the first one.
We have hereby presented three cases of regulations which show different paradigms
regarding the manner and degree of State intervention. While Kenya has opted for a soft
regulation that promotes the expansion and development of mobile payments, Ecuador
has chosen a model with strong state presence and control. In this country,
complementary currencies have a geographically limited scope, while mobile money
licenses are distributed by the state. On the other hand, the Central Bank of Ecuador
guarantees the total convertibility of m-money, facilitating the adoption of the system by
particulars. Finally, we have also presented the situation of Brazil, where though there is
not a defined legislation yet, the preliminary movements tend to restrict the
development of MPS within banking system.
Considering the diverse regulations yielded for m-money and complementary (local)
currencies in some countries, it can be asked what happens with complementary
currencies which operate in an Internet framework. As it was said in the introduction,
Internet does not depend on any geographic area. Compliance of such dispositions may
be very difficult to control in such cases. If such regulations fall at any time in disuse,
then the very distinction between m-money and complementary currencies may
disappear with it.
The following chart summarizes the differences between both mentioned countries with
a current legislation, and conjectures on the probable situation in Brazil.
There is no specific regulation;
the Central Bank of Kenya
controls the performance of
The Central Bank of Ecuador
administers the transaction
system of the money supply
and of the services with
Probably, the Central
Bank of Brazil and
M-PESA Trust Company
The State. The Central Bank
of Ecuador authorizes those
who can distribute e-money
(Banks and Cooperatives of
Saving and Credit).
Commercial banks, in
The M-PESA fund is kept at
the Commercial Bank of
Africa which administers it
directly with the holding
company created .
The e-money has the 1x1
support of the CBE.
Supported by bank
accounts deposits. The
Câmara Interbancária de
Pagamentos may grant
Maximum limits in the
account balance near USD
750, and maximum transaction
amounts USD 530.
The CBE defines the
transaction volume limit per
person on a monthly basis.
Depends on the transaction
amount and if the client is
registered or not.
Prices controlled by the CBE.
As was seen, Ecuador and Brazil sharply distinguish between m-money and (local)
complementary currencies. While the first one has an unrestricted scope and is
associated to telecommunication companies and banks, the second ones are
geographically limited, and associated to cooperatives or local development
organizations. While these definitions do not signify a problem to the performance of
local community currencies, it seems quiet evident that they pose a severe restriction to
the development of barter or mutual credit networks of firms (especially if they use
digital alternative money), since companies do not operate within a restricted area.
Complementary currencies will thus be identified with community or local currencies,
which have a limited impact on development from a macroeconomic standpoint.
Moreover, there exist complementary currencies which allow the use of mobile
technology to transfer credits between accounts. Which is, in this case, the normative
that would rule them? In this sense, Ecuadorian’s law shows a conceptual confusion,
since it defines electronic money as values stored in “electronic or mobile devices” (an
instrumental definition), and following states that e-money will be issued by the Central
Bank of Ecuador. This would entail no contradiction if at the same time the Popular and
Solidary Economy Law did not allow communities to issue complementary currencies,
being that they could be implemented electronically. Consequently, mobile money (a
means of payment) and mobile access to accounts (an instrumental means) are concepts
of different order. Mobile technology may be used by different monetary systems, the
same as different countries actually have different national currencies, but equally use
notes and coins.
There is another controversial matter. Ecuadorian’s law reads that complementary
currencies will be “restricted to the geographical location of the organization's
community”. In consequence, a question arises: how to define “geographical location”
if the community network is a virtual community which operates through Internet? Will
e-communities be forbidden? In the information era, this issue seems to be another
important lacuna, and the geographic criterion seems to have been defined from a
somewhat outdated logic.
Regarding AML/CFT regulations, KYC practices and norms concerning financial
information and suspicious movements, apply to m-money users as well as to banks. In
order to protect consumers against fraud, legal authorities usually enforce different
types of thresholds. They include maximum amounts transferred, maximum
daily/monthly transaction value, maximum amount allowed to be kept in the mobile
wallet, and the like. These thresholds are means through which central banks exert their
control on mobile money.
Finally, an element that should be taken into consideration is the interoperability of
different systems. High costs of transfers from one net to another may slow down the
rate of MPS expansion.
The discussion is open. The development of MPS in our countries will mainly depend
on the ability of our society to set regulations. These norms, while protecting consumers
and controlling illegal operations, should not end up aborting the expansion of a system
before it begins to provide its first profits.
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