Author: James Borley, Director of Payment Services
HM Treasury’s consultation on the future regulatory framework for payments and electronic money may prove to be one of the most significant developments for the UK payments sector since the introduction of the Payment Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011 (EMRs). Whilst we have commented on some of the many proposals under consideration, one more proposal is worth specific mention: HM Treasury’s intention to retain the statutory definition of electronic money within legislation.
At first blush, this may appear to be a relatively straightforward and technical decision. In reality, it perhaps touches on a far more fundamental question: what exactly is e-money, and what role should it play in an increasingly digital financial system?
As we have previously commented, the consultation arrives at a time of PSD3, and European regulators re-examining the concept of e-money itself. Recent interpretations emerging from Europe suggest a narrower and more prescriptive understanding of electronic money, one that could fundamentally alter how Electronic Money Institutions (EMIs) operate.
Against this backdrop, HM Treasury’s proposal to preserve the existing definition may represent more than a preference for continuity. It may reflect an appreciation of the risks that accompany attempts to redefine a concept that has underpinned the growth of the UK’s fintech ecosystem for more than a decade. As a non-lawyer, and one that was at the coalface when the EMRs were implemented, any change to an established legal definition and approach is difficult to understand.
If it ain’t Broke…
The UK’s e-money regime has, by most measures (not least of which the number of EMIs (289) on the Register today) has been a success.
It has provided the regulatory foundation for a wide range of innovative payment services, including digital wallets, prepaid cards, foreign exchange solutions, embedded finance propositions and international payments businesses. The EMI framework has enabled non-bank firms to compete effectively with established financial institutions (precisely the objective of the European Commission) while maintaining appropriate standards of consumer protection through safeguarding requirements and (in the UK) Consumer Duty.
Importantly, the existing definition of e-money has proved sufficiently flexible to accommodate successive waves of innovation. Pointedly, the legislation is usually at pains to emphasise a desire to be ‘technology neutral’. Mobile payments, open banking, platform-based commerce and digital wallets have all developed within the framework, perhaps ‘not in the contemplation of the legislators’ but without creating significant pressure to revisit the underlying legal concept of electronic money.
HM Treasury’s consultation appears to recognise that stability and predictability remain valuable regulatory assets. By retaining key definitions within legislation, the Government seeks to preserve legal certainty while giving the FCA greater flexibility to adapt operational requirements as technology evolves.
The Emerging European Perspective
Recent developments within the EU illustrate an alternative approach. Following European Court of Justice case law and subsequent regulatory interpretation by the European Banking Authority (EBA) and European Commission, increasing emphasis has been placed on understanding e-money as a separate monetary asset rather than simply a digital representation of safeguarded funds. Under this interpretation, the requirement that e-money be accepted by parties other than the issuer takes on greater significance, and greater distinction is drawn between e-money and conventional commercial bank money.
The practical consequences of this debate should not be underestimated. For many years, industry participants have largely operated on the assumption that e-money represents electronically stored monetary value backed by safeguarded funds received from customers. After all, that’s pretty much how e-money is defined in Regulation 2(1) of the EMRs.
A narrower interpretation challenges that understanding and potentially raises questions about whether certain wallet products, account structures and payment solutions continue to fit comfortably within the traditional e-money framework.
The debate is therefore not merely academic. It goes directly to the question of how payment institutions and EMIs are structured, supervised and authorised.
The Risks of Redefining E-Money
If the UK were ultimately to move towards a narrower interpretation of e-money, the consequences for the sector could be considerable.
Regulatory Uncertainty
The most immediate risk would be uncertainty.
The UK’s EMI sector has spent years building products, compliance frameworks, safeguarding arrangements and customer journeys around a settled understanding of electronic money. Reinterpreting the definition would inevitably create questions regarding whether existing products continue to qualify as e-money and whether existing permissions remain appropriate and might necessitate a widescale re-authorisation exercise.
For firms, investors and consumers alike, prolonged uncertainty can be more damaging than the introduction of additional regulatory requirements.
Business Model Disruption
A narrower definition could force many firms to reassess their operating models.
If e-money is viewed as a separate monetary asset rather than a digital representation of safeguarded fiat funds, firms may need to demonstrate precisely how that asset is created, held, transferred and redeemed. Products that currently operate within relatively straightforward regulatory frameworks could require significant legal and operational restructuring.
Digital wallets, multi-currency products, embedded finance solutions and account-based payment propositions could all be affected.
Pressure on the EMI Model
Perhaps more significantly, redefining e-money could blur the distinction between e-money and deposits.
Many EMI products function as practical alternatives to traditional current accounts. The regulatory distinction between deposits and e-money has enabled non-bank firms to offer payment services without becoming fully authorised banks. If that distinction becomes less clear, regulators may begin to question whether certain products remain properly categorised as e-money.
In turn, some firms may face pressure to alter their structures, rely more heavily on banking partners or even pursue banking licences themselves.
Such an outcome could reduce competition (remember, this was one of the main objectives of e-money legislation) and weaken one of the central strengths of the UK’s fintech sector.
Increased Compliance and Safeguarding Costs
Redefining e-money would likely have consequences for safeguarding.
The current regime is built on the principle that customer funds received in exchange for e-money are safeguarded and redeemable at par. If e-money itself becomes characterised as a separate monetary asset, questions naturally arise regarding whether existing safeguarding arrangements remain appropriate, irrespective of the strengthening introduced under CASS 15.
The result could be more complex safeguarding structures, enhanced reporting requirements, additional prudential obligations and higher compliance costs across the industry. Oh, and don’t forget the possible re-authorisation exercise we mentioned earlier.
These burdens would be particularly challenging for smaller firms and new market entrants.
Litigation and Supervisory Risk
Changes in interpretation inevitably create scope for disagreement. If you hadn’t noticed yet, I personally disagree with the ECJ, EBA and European Commission conclusions!
A fundamental redefinition of e-money could generate disputes regarding authorisations, customer protections, safeguarding arrangements and business model classifications. Different supervisory teams may reach different conclusions on similar products, while firms may challenge regulatory decisions through legal channels.
The market could face years of uncertainty before a settled interpretation emerges.
The Stablecoin Question
The timing of this debate is especially important because it coincides with the emergence of regulated stablecoins and tokenised payment systems.
HM Treasury’s consultation contemplates bringing qualifying stablecoins within the broader payments framework while supporting innovation in tokenised payments and digital financial infrastructure.
This creates an interesting challenge. If e-money is redefined as a distinct digital monetary asset backed by reserve assets and redeemable at par, the conceptual distinction between e-money and certain fiat-backed stablecoins becomes increasingly difficult to articulate. Both may function as digital representations of value. Both may be used for payments. Both may be backed by underlying assets and redeemed at face value.
Rather than creating greater clarity, redefining e-money could therefore create new areas of overlap between regulatory frameworks.
At a time when policymakers are already seeking to integrate stablecoins, tokenised deposits and other forms of digital value into the financial system, introducing additional definitional complexity may prove counterproductive.
A Better Approach?
The UK’s current direction, however, appears to reflect a more pragmatic philosophy.
The Bank of England, Prudential Regulation Authority and HM Treasury have repeatedly emphasised proportionality, innovation, technology neutrality and equivalent regulatory outcomes for equivalent risks. These principles suggest a focus on economic substance and consumer outcomes rather than rigid legal categorisation.
Viewed through that lens, the objective should not necessarily be to determine whether every new form of value transfer fits neatly within a predefined category. Instead, the focus should be on ensuring appropriate safeguards, redemption rights, operational resilience and consumer protection irrespective of the underlying technology.
This approach may be particularly important as digital money continues to evolve. Stablecoins, tokenised deposits, programmable payments and future forms of digital currency may increasingly blur traditional distinctions between payments, banking and financial market infrastructure.
Conclusion
Despite meriting only a few lines (paragraph 2.9 if you’re asking), HM Treasury’s proposal to retain the existing statutory definition of electronic money may prove to be one of the most important aspects of its payments consultation.
While recent European developments have stimulated valuable debate about the nature of e-money, any attempt to redefine the concept carries significant risks. Regulatory uncertainty, business model disruption, increased compliance costs, safeguarding challenges, litigation risk and potential overlap with stablecoin regulation all need to be considered carefully.
For the UK, the greater opportunity may lie not in redefining e-money but in creating a framework capable of accommodating both existing and emerging forms of digital money. As the boundaries between e-money, deposits, tokenised assets and stablecoins continue to converge, regulatory success will depend less on perfect definitions and more on delivering coherent, proportionate and future-proof outcomes.
In that respect, preserving the existing definition while modernising the surrounding framework may not be regulatory conservatism. It may simply be good regulatory design. If you agree, or even if you don’t, please do take the time to provide feedback to the Consultation, which closes on 6 October 2026.
How Complyport Can Help
As the UK payments and e-money regulatory framework continues to evolve, firms should assess how proposed reforms could affect their regulatory permissions, governance arrangements and business models. Early preparation can help minimise regulatory risk and ensure firms are well positioned for future change.
Complyport supports EMIs, PIs and fintech firms by providing expert advice on:
- Assessing the impact of HM Treasury’s proposed payments and e-money reforms;
- FCA authorisations, variations of permission and ongoing regulatory compliance;
- Safeguarding arrangements and compliance with the FCA’s safeguarding requirements, including CASS 15 where applicable;
- Governance, risk management and operational resilience frameworks;
- Regulatory change implementation and gap analysis;
- Prudential risk management and regulatory reporting obligations;
- Consumer Duty implementation and customer outcome assessments, where applicable;
- Strategic regulatory advice for firms developing new payment products, digital wallets and innovative payment solutions.
Whether you are reviewing your current operating model or preparing for future regulatory developments, Complyport’s regulatory specialists can help you navigate change with confidence.
To discuss how the proposed reforms may affect your business, contact Complyport today to book a meeting with one of our Subject Matter Experts.
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