Outline of the Report of
The Working Group on Electronic Money and Electronic Payment Systems has been discussing various issues surrounding electronic money and electronic payment, including ensuring security measures, establishing fair transaction rules, and requiring a minimum level of fitness and propriety on the part of the providers of electronic money and electronic payment, with an eye to cultivating an environment for their sound growth in Japan, an environment that responds to the development of new payment services using information and communication technologies. On May 23, 1997, the Working Group compiled a report, an outline of which is given as below.
1. Current State of Electronic Money and Electronic Payment
(1) Electronic technologies are increasingly being used in the financial services industry due to recent developments in information and communication technologies. Formerly, this was evident only in the field of corporate wholesale payment, but recently various experiments have been being conducted in the field of consumer retail payment. In Japan, electronic technologies are used in the field of financial services, but it is only recently that measures have been taken aiming at their wide use in the field of small-value retail payment.
(2) New payment services using information and communication technologies can be tentatively categorized into the electronic "value" that transaction parties exchange with each other (electronic means of payment), and electronic "ways" such as those that instruct financial institutions to transfer deposits (electronic ways of payment). We refer to "electronic money" as meaning electronic means of payment and "electronic payment" as meaning electronic payment in general including new forms of electronic ways of payment.
2. Considerations on Electronic Money and Electronic Payment
Electronic money and electronic payment will enhance payment functions in the financial sector by providing effective means and ways of payment. Therefore, from the viewpoint of user utility, the cultivation of an environment that effectively supports the sound and smooth development and prevalence of electronic money and electronic payment is important. Also important in this regard are the encouragement of private sector technological developments and efforts because of the rapid innovation in technology, the cultivation of an environment that makes it easy for consumers to use electronic money and electronic payment and that enhances their prevalence, and the bolstering of international inter-operability in view of cross-border use.
3. Technology Used in Electronic Money and Electronic Payment
(1) Electronic money and electronic payment entail the risks of counterfeiting and tampering. Achieving an acceptable level of effective security is possible through the use of advanced cryptographic technologies and electronic devices; that notwithstanding, constant review in light of new technological developments will still be necessary.
(2) Technical security measures should basically be the responsibility of service providers, and their level should be determined through consumer choice. In this respect it is necessary that notices by the Ministry of Finance on electronic fund transfers be reviewed and possibly abolished, while measures be considered that ensure the disclosure of information on security measures in comparable forms and ensure the probity of such information. For those targeted at small-value consumer payment, appropriate consumer protection measures are necessary in light of the need to cultivate an environment that allows consumers who do not understand advanced technologies to nonetheless use electronic money and electronic payment securely.
4. Transaction Rules Concerning Electronic Money and Electronic Payment
(1) For electronic money and electronic payment aimed at small-value retail payment, there is a need to assure fair procedures such as adequate disclosure by service providers on such things as the content of services and convenient conflict resolution process, as well as the formation of fair transaction rules to limit consumer loss in case of accident, with an eye to cultivating an environment that allows consumers who have limited technical knowledge and a limited ability to bear such losses. Especially in regard to such new services as electronic money, in order to enhance their sound and smooth prevalence, it is appropriate that government involvement in promoting the formation of fair transaction rules be considered.
(2) In light of cultivating an environment for the free development and/or design of electronic money and electronic payment, consideration should be given to the legislative resolution of legal issues. Such legal issues include the effectiveness of "declaration of intention" in cases of electronic payment where the material facts of the transaction are not properly understood due either to error or mischief under Japanese civil law, and the conditions necessary for setting up against third parties in the assignment of electronic money.
(3) Consideration should be given both to the protection of user rights and the establishment of procedures to enable users to be effectively protected even when the issuer of electronic money becomes insolvent for reasons such as counterfeiting.
5. Provider of Electronic Money and Electronic Payment
(1) Certification authorities authenticating messages that ensure the security of communication are important in open networks with high risks of unlawful intervention by third parties. Therefore discussion should be promoted regarding the fitness and propriety of such authorities and their areas of responsibility.
A high level of fitness and propriety are especially required for certification authorities authenticating messages in electronic payment. It should be noted that specific measures ensuring fitness and propriety in view of consumer protection are not necessarily needed, as authentication in electronic payment can be regarded as a part of payment services. It is appropriate to allow financial institutions to provide authentication services.
(2) For issuers of electronic money, a high degree of financial soundness and adequate technical and operational capabilities are necessary. But that does not mean issuers should be limited to existing deposit-taking financial institutions with licenses secured under the Banking Law or other laws. It would be appropriate to put in place measures which allow entities other than existing deposit-taking financial institutions to issue electronic money, with an eye to encouraging new entrants and developing electronic money through competition among various entities in the market.
Regarding the cultivation of an environment that allows consumers to use electronic money and electronic payment at their ease and still maintains the integrity of the payment system as a whole, measures are necessary to ensure the fitness and propriety of issuers of electronic money, such as setting up of appropriate entrance rules and supervision; most of these issuers aim at small-value retail payment. For existing deposit-taking financial institutions with licenses secured under the Banking Law or other laws, such objectives can be attained under the existing supervisory framework. For other entities, appropriate measures, such as limiting investment to secure liquid assets and the supervision of their operations, will be necessary to ensure fitness and propriety.
6. Implications of Electronic Money and Electronic Payment on Monetary Policy
(1) The spread of electronic money could theoretically cause an easing of monetary conditions in the economy. Some point out that it might also hamper the central bank's monetary operations by making the demand for reserve deposits volatile or by shrinking the central bank's balance sheet. However, serious problems are unlikely to arise for the central bank unless electronic money spreads significantly in a short period of time; and even if that were to occur, it would be possible to counter it with appropriate measures.
(2) Electronic money and electronic payment will make transactions in payment services across borders easier and, therefore, make it necessary to strengthen the competitiveness of Japanese financial institutions. In this respect, the development of services aiming at international inter-operability and the establishment of an internationally compatible framework are both necessary. It should be noted that measures to protect domestic users will not function properly for services provided by foreign entities.
7. Implications of Electronic Money and Electronic Payment for the Maintenance of Social and Economic Order
(1) Regarding the fraudulent use of electronic money, some point out that it can be used to launder money or evade tax, especially when fund transfers with electronic money can be anonymous. Security measures such as setting value limits can prevent such fraud to a great extent. In the future, especially when large amounts of funds are involved, there may be a need to take measures in cooperation with other countries.
(2) Electronic money is, in principle, outside the scope of the Law Regulating Securities Resembling Currencies, which is aimed at protecting the functions of currency with mandatory circulating power. If the prevalence of electronic money reaches a point where the maintenance of currency order is disturbed, certain strict measures should be taken.