It is said that today, the world is witnessing the fourth industrial revolution, or Industry 4.0; an industry which “is characterized by a range of new technologies that are fusing the physical, digital and biological worlds, impacting all disciplines, economies and industries, and even challenging ideas about what it means to be human”. Market players are now turning to crypto-assets and the underlying distributed ledger technology to transact with one another.
Crypto-assets are generally divided into three categories, namely:
A number of regulatory authorities around the world, such as the European Supervisory Authorities (the “ESAs”), the UK Financial Conduct Authority (the “FCA”), the US Securities and Exchange Commission (the “SEC”) and the Malta Financial Services Authority (the “MFSA”) have, in the past months, published guidance and advice intended to provide clarity to market players transacting in crypto-assets, while others chose to enact legislation to regulate such crypto-assets or crypto-asset related activities. Apart from providing adequate protection to those transacting in crypto-assets, such measures were also intended to ensure that firms whose business activities revolve around crypto-assets are able to determine whether such crypto-assets fall within the scope of domestic or EU financial and securities laws – which would therefore require such firms to conduct themselves in accordance with the relevant regulations.
A particular type of crypto-asset can be used to facilitate the buying and selling of goods and services and other payment services. These crypto-assets are generally termed as “Payment Tokens”. Payment Tokens are not issued or backed by any central authority, however, are generally accepted to constitute a means of payment by the general public. This said, many jurisdictions do not consider them as legal tender and as a result, are not considered to constitute ‘money’.
Enter “Stable Coins”: Stable Coins are types of Payment Tokens whose value is stabilised by being pegged to fiat currency, and which are generally backed at a rate of one-to-one by fiat currencies of a central bank of a particular country, by other crypto-assets or by any other types of assets.
Stable Coins were at the heart of a number of publications issued by the ESAs, the European Central Bank (the “ECB”) and other European regulatory authorities. The prevailing concerns surrounding Stable Coins is their proximity to Electronic Money – a payment instrument which is regulated under the Electronic Money Directive (Directive 2009/110/EC) (“EMD2”).
The EMD2 defines “Electronic Money” 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 … and which is accepted by a natural or legal person other than the electronic money issuer”.
The section below will analyse the elements constituting Electronic Money and whether Payment Tokens or Stable Coins can be classified as Electronic Money.
the aim behind this wording was to widen the scope of the definition so as to avoid impeding technological innovation. In this respect, the wording was amended to include both Electronic Money products available at the date of the coming into force of the EMD2, as well as those products which could be developed in the future – thereby achieving technical neutrality. This part of the definition therefore also captures those Payment Tokens which can be classified as Electronic Money issued on the blockchain or similar distributed ledger technologies.
Electronic Money is a mere representation of its fiat money equivalent and does not represent the value of any other tangible assets, commodities or other Payment Tokens whose value doesn’t represent fiat money.
In an opinion submitted by the Attorney General to the CJEU, P. Storrer was quoted as follows: “the claim to electronic money has two aspects, depending on whether it concerns the holder: claim for redemption…, or the acceptor: claim for conversion…”. Having full knowledge that they will be able to claim, from the Electronic Money issuer, a sum of Funds equivalent to the sum of money they would have received had they been paid in cash, creditors would be more likely to accept payment in such Electronic Money. This claim also holds true for the Electronic Money holder, i.e. the person to whom such Electronic Money were initially issued.
The question remains as to whether issuers can somehow limit the claims of Electronic Money holders in their regard, and if so, whether such limitations are enough to cause crypto-assets not to classify as Electronic Money. One may argue that limitations do not extinguish claims on the issuer completely, and therefore, limitations imposed on claims have a neutral effect on the elements constituting Electronic Money. On the other hand, one may also argue that even if claims are completely extinguished, Electronic Money holders would still have a residual claim on the issuer, ranking pari passu with other ordinary creditors, effectively also having a neutral effect on the elements constituting Electronic Money.
Electronic Money can only be issued once payment has been received by the issuer. This therefore excludes the granting of credit since in such instances, funds wouldn’t have been paid prior to the issuance of Electronic Money.
Emphasis is also placed on the term ‘funds’; the Payment Services Directive (Directive 2015/2366) (“PSD2”) defines “Funds” as “banknotes and coins, scriptural money or Electronic Money [et cetera]”. Payment Tokens which are acquired by crypto-assets not constituting Funds are therefore not capable of being classified as Electronic Money. This also ties up with Electronic Money’s distinctive feature of being a mere representation of fiat currency.
the definition of a “Payment Transaction” in PSD2 is rather circular, as it is described as an “act, initiated by the payer or on his behalf or by the payee, of placing, transferring or withdrawing funds [et cetera]” – taking us back to “banknotes and coins, scriptural money or Electronic Money”. This means that any Payment Transactions effected by means of Payment Tokens not constituting Funds fall outside the scope of EMD2.
The assessment of whether Payment Tokens or Stable Coins can be classified as Electronic Money also depends on whether the EMD2 requires Electronic Money to be issued exclusively for the purpose of making Payment Transactions or else, issued for the purpose of making Payment Transactions amongst other purposes. If it is to be presumed that the Electronic Money should be issued exclusively for the purposes of making Payment Transactions, then, Payment Tokens attaching additional rights, such as voting rights, would fall outside the scope of the definition of Electronic Money. Conversely, a wider interpretation would cause Payment Tokens granting such additional rights to fall within the scope of the EMD2.
This characteristic ought to hold true for every instrument of payment, including Payment Tokens issued on distributed ledger technology; in that the particular instrument of payment should be accepted as a means of payment by all the parties involved in a particular transaction, irrespective of the issuer.
Amongst others, Articles 11(1) and 11(2) of the EMD2 require that “electronic money issuers issue electronic money at par value on the receipt of funds” and that “upon request by the electronic money holder, electronic money issuers redeem, at any moment and at par value, the monetary value of the electronic money held”.
As part of the Virtual Financial Assets Regulatory Framework in Malta, the MFSA devised a test for the purpose of determining whether crypto-assets (which in Malta are referred to as “DLT Assets”) qualify, inter alia, as Electronic Money. This test is referred to as the Financial Instrument Test. In probing whether a DLT Asset classifies as Electronic Money, the Financial Instrument Test refers to elements of the definition of Electronic Money, as well as the obligations imposed on Electronic Money issuers by virtue of Article 11 of the EMD2 hereinabove mentioned. Particularly, the Financial Instrument Test poses questions as to whether:
Accordingly, the MFSA went beyond the essential elements constituting Electronic Money in terms of the definition found in the EMD2, implying that those DLT Assets, Payment Tokens or Stable Coins which are not issued at par, or are not redeemed at par at any moment, upon the request of the electronic money holder, fall outside the scope of the EMD2.
One may argue that the right for redemption may be obvious and indirectly discernible from the definition of Electronic Money itself, since issuance and redemption complement each other, especially since it ties in with the abovementioned “claim on the issuer”; in that Electronic Money holders would have the possibility to ‘claim’ their funds back ‘from the issuer’ at all times by credit transfer or in cash. However, the fact remains that redemption is not part of the elements constituting Electronic Money.
Experience has shown that in their terms and conditions, issuers of Payment Tokens and Stable Coins tend to reserve the right to delay or suspend redemptions, effectively causing such DLT Assets not to classify as Electronic Money in terms of the Financial Instrument Test. A similar case may be argued for issues and redemptions of Payment Tokens not made at par value – this, however, is generally not the case for Stable Coins; them being pegged one-to-one with fiat currencies.
This begs the question as to whether the breach of a legal obligation imposed on the Electronic Money issuer ought to cause a DLT Asset, Payment Token or Stable Coin not to classify as Electronic Money – in simple terms, is Electronic Money less of Electronic Money if its issuer is in breach of law, irrespective of the fact that all elements contemplated in the definition of Electronic Money would have been met?
In its FAQ document, the MFSA explained that while Stable Coins may exhibit certain similarities to Electronic Money, such Payment Tokens would need to satisfy all of the requirements under the EMD2 in order to be classified as Electronic Money. This, however, contradicts the questions posed by the Financial Instrument Test; which test was introduced by the MFSA by virtue of Article 47 of the Virtual Financial Assets Act (Cap 590) for the purposes of classifying DLT Assets.
In one of its Occasional Paper Series, the ECB Crypto-Assets Task Force stated that “some stable coins, to the extent that they have an identified issuer, are not crypto-assets according to the definition used in this paper and might qualify as e-money under some national legislation”. In this respect, in a recent letter, Mario Draghi, President of the ECB, emphasised that “from a regulatory perspective, stable coins, like any other emerging financial product, should be subject to the “same business, same risks, same rules” principle based on a comprehensive assessment of their functionalities”, effectively bringing those Stable Coins possessing the necessary elements of Electronic Money within the scope of the EMD2.
Similarly, in its Guidance on Crypto-assets, the FCA stated that “depending on what they are backed with, how they are arranged and how they are structured, will fall into different categories of our taxonomy. For instance, a ‘stablecoin’ could be considered a unit in a collective investment scheme, a debt security, e-money or another type of specified investment. It might also fall outside of the FCA’s remit. Ultimately, this can only be determined on a case-by-case basis”.
In conclusion, one ought to appreciate that there are no clear guidelines as to how or whether certain types of crypto-assets, specifically Stable Coins, classify as Electronic Money, and therefore – irrespective of any test – it ultimately depends on the elements constituting those particular crypto-assets, the interpretation of the EMD2, jurisprudence and the arguments presented for and against such classification.
 ‘The Fourth Industrial Revolution Built On Blockchain And Advanced With AI’ (Forbes.com, 2019) <https://www.forbes.com/sites/darrynpollock/2018/11/30/the-fourth-industrial-revolution-built-on-blockchain-and-advanced-with-ai/#74d5ade74242> accessed 25 August 2019
 ‘The Fourth Industrial Revolution, By Klaus Schwab’ (World Economic Forum, 2019) <https://www.weforum.org/about/the-fourth-industrial-revolution-by-klaus-schwab> accessed 25 August 2019
 Ibid., page 46
 Vis-à-vis the old wording “stored on an electronic device”, vide Article 1(3)(b) of Directive 2000/46/EC
 EMD2, recital 8
 Ibid., recital 7
 Which presumably is not “an electronic device”, as previously defined under Directive 2000/46/EC
 Edmund Falkenhahn AG vs. The Financial Market Authority (Finanzmarktaufsicht), EFTA Court, 30 May 2018 <https://efta-dev-demo.ichosting.lu/download/9-17-judgment-2/?wpdmdl=1806&ind=0> accessed 1 September 2019, point 41
 Case C‑389/17, REQUEST for a preliminary ruling under Article 267 TFEU from the Lietuvos vyriausiasis administracinis teismas (Supreme Administrative Court, Lithuania), made by decision of 21 June 2017, received at the Court on 29 June 2017, in the proceedings brought by ‘Paysera LT’ UAB, formerly ‘EVP International’ UAB, third party: Lietuvos bankas, delivered on 4th October 2018
 Storrer P., “Droit de la monnaie électronique”, RB Édition (Paris 2014), page 61-65
 Serge Lanskoy, “The Legal Nature of Economic Money” Banque de France Bulletin Digest No. 73 (January 2000) <http://www.cemla.org/legales/docs/al-v-Grenouiolloux.pdf> accessed 20 March 2019
 Ibid., page 30
 EMD2, Article 6(1) & recital 13
 PSD2, Article 4, Point 25
 PSD2, Article 4, Point 5
 Proposal for a Directive of the European Parliament and of the Council 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 Directive 2000/46/EC (COM(2008) 627 final), Article 5
 Virtual Financial Assets Framework Frequently Asked Questions
 Occasional Paper Series: Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures, No 223 (ECB Crypto-Assets Task Force, May 2019)
 Ibid., page 14
 ‘Letter from the ECB President to Mr Markus Ferber, MEP, on stablecoin initiatives’ (Ecb.europa.eu, 2019) <https://www.ecb.europa.eu/pub/pdf/other/ecb.mepletter190726_Ferber_1~fc2089bb67.en.pdf?4a43ca668e6671157ff0c699665dd972> accessed 1 September 2019
 Ibid., page 38