New regulatory approach to Ecuador’s electronic money from a comparative

international scope*

Gustavo Almeida O.**

Abstract

Fintech has taken considerable importance for emerging countries. Electronic Money (“Dinero
electrónico”) was implemented in Ecuador as a governmental monopoly per the regulatory
framework of the country.

In the light of other experiences in other developing countries, a more suitable regulatory
framework is proposed in this paper.

This paper will analyze the most important characteristics of this Fintech project in Ecuador.

Key Words:

Fintech, Electronic Money, Dinero Electrónico

Summary:

1. Introduction; 2. A quick overview: What is Fintech; 3. The electronic currencies and mobile
payment industry; 4. Ecuador’s “Electronic Money” Experience; 5. A comparative
Experience; 6. How to regulate electronic money in Ecuador from a comparative experience;
7. Conclusions; 8. Sources

* This paper was written in 2017 for the Fintech Challenge course of the University of Pennsylvania
Law School.

** LL.M. University of Pennsylvania Law School (Philadelphia, USA); Wharton Business & Law
Certificate - The Wharton Business School (Philadelphia, USA); Attorney (JD equivalent). Pontificia
Universidad Católica del Ecuador (Quito, Ecuador).

The content of this paper reflects the exclusive and individual analysis and opinion of the author
regarding the analyzed topic, and does not reflect, nor purports to be attributed to, any other person´s
or institution´s with which the author maintains or has maintained a professional or contractual
relationship.

Electronic copy available at: https://ssrn.com/abstract=3794899

1. Introduction

Technology applied to financial services Fintech has been the result of innovation and
creativity. Nowadays, Fintech is an area of human development where there is considerable
expectation from consumers, participants, and regulators. Despite this disruptive trend having
impact worldwide, its development has not been homogenous. Even if it is still too early to
determine how far will Fintech go and how will it transform financial markets, especially in
the case of emerging markets, it is conceivable to assume that governments around the world
might be evaluating the need and the way to regulate Fintech. This answer may differ
depending on each country. In any case, and although is it reasonable to think that nations
sovereignty claims for certain regulatory approaches toward Fintech, such approach must be
analysed carefully, so that innovation is not discouraged by intensity of the regulatory frame.

In that context, this paper will focus on Ecuador’s regulatory position on a Fintech product,
and how has this approach affected private innovation and consumers at large. We will explore
how convenient was regulating “Dinero electronico” (or its translation Electronic Money) as a
governmental monopoly instead of letting private Fintech projects surge. Finally, this paper
will propose a more suitable regulatory framework for emerging markets as Ecuador in the
light of other experiences in other developing countries.

2. A quick overview: What is Fintech

We refer to Fintech as the implementation of technology to address financial solutions.1 The

combination of technology and financial services is not really as new as we might expect.
Indeed, Fintech has so far been analysed as having already four stages, commencing with the
implementation of the telegraph and the transatlantic cable, from 1866-1967 (Fintech 1.0);
1967-2008 (Fintech 2.0); 2008-nowadays (Fintech 3.0); and, Fintech 3.5 (referred as Fintech
in emerging markets).2 In all these stages, new technology has been the driver of major changes
in support of financial services ran traditionally by banks and financial entities.

1
Douglas W. Arner et al., The Evolution of Fintech: A New Post-Crisis Paradigm? 47 Geo. J. International Law,
1271, 1272 (2016).
2
Id. at 1276.

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However, Fintech relates nowadays to “an economic industry composed of companies that use
technology to make financial systems more efficient."3 Thus, Fintech has become an industry
in its own, comprising diverse areas such as finance and investment, risk management;
payments and infrastructure; data security and monetization, among others.4 The impact of this
new industry is reportedly very important as it is considered to be an expanding industry that
is constantly requiring more investments. As Zavolokina mentions, based on a 2015 Accenture
report the quantity of investments into FinTech companies and start-ups has increased
considerably from USD 4.05 billion in 2013 to USD 12.2 billion in 2014.5 This shows that this
industry has potential to continue developing.

Moreover, in Latin America, Fintech has the opportunity to contribute to the development of
small and medium enterprises to generate employment in the region, while increasing access
to financial services for previously ignored population.6 For instance, the Interamerican
Development Bank has already identified 703 Fintech start-ups located in 15 countries in Latin
America, whose projects are arranged in 10 segments, including: alternative finance platforms,
payment solutions, enterprise financial management, enterprise technology for financial
institutions, personal financial management, asset management, trading and capital markets,
digital banks, insurance, and alternative scoring.7

3. The electronic currencies and mobile payment industry

For purpose of this writing we consider that, as explained by Chris Brunner and Daniel Gorfine,
electronic currencies could be assimilated to money transfer services that are tied to a fiat
currency, which have grown in importance for enhancing financial inclusion that are far from
the ordinary payment set-up. 8 Mobile devices have an important role in the economy because

3
Brendan McManus, What is Fintech?, WHARTON FINTECH, (Feb. 16, 2016)
http://www.whartonfintech.org/blog-archive/2016/2/16/what-is-fintech (last visited Dec 15, 2016).
4
Arner at 1291.
5
Liudmila Zavolokina et al., FinTech – What’s in a Name?, ZURICH OPEN REPOSITORY & ARCHIVE 1 (2016),
http://www.zora.uzh.ch/id/eprint/126806/1/FinTech_Research_Paper_revised.pdf.
6
International Development Bank & Finnovista, Fintech: Innovations You May Not Know were from Latin
America and the Caribbean, INTERAMERICAN DEVELOPMENT BANK 1-10 (May, 2017)
https://publications.iadb.org/handle/11319/8265#sthash.aAd6qTq2.dpuf (then select “English version”)
7
Id. at 12-13.
8
Chris Brummer & Daniel Gorfine, FinTech: Building a 21st-Century Regulator's Toolkit, MILKEN INST. 2 (Oct.
2014), http://assets1c.milkeninstitute.org/assets/Publication/Viewpoint/PDF/3.14-FinTech-Reg-Toolkit-
NEW.pdf.

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besides permitting the purchase of goods, they are also a mechanism to deliver money. In this
context, we chose to refer interchangeably to electronic money and mobile payment products.

In that sense, mobile payments permit consumers to make transactions through text messages
or by downloaded applications for mobile phones. The main purpose of this technology may
be to avoid using traditional means of payments such as cash and facilitate the way dealings
are conducted by at the same time providing the perception of a digital wallet.9

It is well recognized that one of the functions that the financial system serves is for settling
payments, which allows for goods and services exchange. Admittedly, a payment system is “a
set of instruments, procedures, and rules for the transfer of value among system participants,”10

Payment industry may have started in association with banks, and, especially in the United
States, the payment-industry has permanently evolved since then. As mentioned by James
Sivon when summarizing history of payment industry in the U.S:

Electronic payments have displaced checks as the dominant form of non-cash

payment. New technology and legislation has effectively resulted in almost all
checks being turned into electronic form at some point during processing. Within
electronic payments, methods of transactions have shifted dramatically. Credit
cards were the major alternative to checks for over three decades, but have been
overtaken by debit cards as the most popular form of electronic payment. Prepaid
cards, a minor form of payment a decade ago, have grown by over 10 fold in the
past ten years. Mobile payment technology, currently still being developed, could
upend the entire system as a new and emerging form of payment. (…)”11

However, the mobile payments industry has separated from the same mobile banking industry.
Indeed, despite the similarity of the use of the services offered by these companies, they differ
on the following grounds. Firstly, mobile payments are enterprises that are usually operated by
non-bank institutions that use mobiles to provide payment services among peers, where funds
are delivered from a bank account of a party for a transaction.12 Instead, mobile banking is
related to the relationship between a customer and his/her financial institution, for instance

9
Brianna L. Reed, Mobilizing payments: Behind the screen of the latest payment trend, 14 J. High Tech. L. 451,
452-453 (2014).
10
Barr, Michael S. et al., Financial Regulation: Law and Policy, Chapter 1.1 - Finance Today, SSRR 19 (May 3,
2016) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2778111 (then select Download this paper).
11
James Simon et. al., UNDERSTANDING FINTECH AND FINTECH LAW: A PRACTICAL GUIDE 20-21 (2016-2017 Ed.).
12
Stephen Congdon, What's in Your Wallet: Addressing the Regulatory Grey Area Surrounding Mobile Payments,
7 Case W. Res. J.L. Tech. & Internet 95, 99 (2016).

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when a person access his/her bank account from a mobile phone as the party is still using an
extension of the bank account.13 In other words, mobile banking needs users to log on to a
financial institution's website, while mobile payment remit funds in a direct way to the
recipient, through a mobile using either text messaging, web application, or web browser.14

In that sense, mobile payments can be more than just a tool allowing transactions to take place.
Mobile payments could also be seen as an opportunity for financial inclusion due to high cost
of bank accounts, which are the result of factors such as being required to maintain a minimum
balance, service fees, logistic issues (physically going to the bank to conduct operations), as
well as other requirements.15 Therefore an increasing access to mobile services, could likely
permit that mobile payment becomes a more adjusted mechanism for inclusion in the financial
system, since mobile operator model, rather than financial, is easier and at low cost.16

4. Ecuador’s “Electronic Money” Experience

Ecuador’s Fintech product Electronic Money was developed as a government-only-service

within the following legal framework.

4.1.The Constitution

The Ecuadorian Constitution is the supreme norm of the country.17 It establishes that the central
state has exclusive competences over monetary policy, acting through the Central Bank. The
regulation of means of payment is part of the monetary policy.18 Likewise, article 309
establishes that the national financial system is composed, among others, of the public and
private entities and article 66 recognizes the right of individuals to develop economic activities
in line with the principles of solidarity, social and environmental responsibility.

13
Id.
14
Taylor, Kevin C., FINTECH LAW: A GUIDE TO TECHNOLOGY LAW IN THE FINANCIAL SERVICES INDUSTRY,
CHAPTER 5. MOBILE FINANCIAL SERVICES, 5-4, 5-5 (2014) (Bloomberg BNA).
15
Elisabetta Cervone, M-Payments: How much Regulation Is Appropriate? Learning from the Global Experience,
in BITCOIN AND MOBILE PAYMENTS: CONSTRUCTING A EUROPEAN UNION FRAMEWORK 121,122 (G. Gimigliano
ed., 2016) (ebook).
16
Id.
17
Constitución de la Republica [Constitution], Oct. 20, 2008, SR 449, art. 302, 303 (Ecuador).
18
Id. art. 261.5

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In other words, the Constitution provides for private participation within the financial sector as
well as other sectors.

4.2.Applicable Statute

Ecuador issued the Monetary and Financial Code in September of 2014, which is the legal
norm that regulates the financial and monetary system.19 It establishes that US the dollar is the
official currency and that transactions must be recorded in such currency.20 Article 99
recognizes means of payment different from the US Dollars, such as foreign currencies, checks,
electronic and digital transfers and other of similar nature, as regulated by the Monetary and
Financial Regulatory Body.21

4.3.Regulation of Electronic Money

Even before the issuance of the Monetary and Financial Code, the Central Bank of Ecuador
regulated the Electronic Money an electronic means of payment, managed privately by the
Central Bank of Ecuador, valued in US dollars, which is exchangeable only through electronic
devices.22

After the Monetary and Financial Code issuance, the Monetary and Financial Regulatory Body
has issued several resolutions on how regulating the government’s mobile payment system.23
The resolution now in place, which still mentions that Electronic Money is managed privately
by the Central Bank of Ecuador, was issued in 2016, and describes the basic framework works
as follows24: Firstly, the system is formed by the Central Bank of Ecuador who acts as
administrator and is deemed to be responsible for the supervision of the system; secondly,
private and public financial institutions act as integrators of the system (as all transactions are
deemed to go through financial entities) and financial and non-financial institutions act as

19
Código Organico Monetario y Financiero [Monetary and Financial Code] Sept. 12, 2014, SR 332 (Ecuador).
20
Id. art. 94.
21
Id. art. 99.
22
Resolution 017-2011, Jan. 27, 2011, SR 372 (Ecuador).
23
See Resolutions: 005-2014-M (Nov. 6, 2014); 064-201S-M (April 16, 2015); 105-2015-M (July 22, 2015);
106-2015-M (July 22, 2015); 109- 2015-M (July 23, 2015); 252-2016-M (June 14, 2016); 258-2016-M (June
29, 2016) (Ecuador).
24
Resolution 274-2016, Nov. 10, 2016, SR 857. (Ecuador).

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macro-agents.25 Finally, mobile companies, with which the Central Bank has signed an
agreement, act as technological operators.26

From the perspective of the users, an electronic account is created in the Central Bank of
Ecuador which is linked to the person’s identification number (ID) and a given cell phone
number. 27 Users then deposit U.S. dollars with the Central Bank of Ecuador’s macro-agents
(for instance, banks) through any of the macro-agents’ contact centres, which need to be
authorised by the Central Bank to act within this mobile payment system. 28

The macro-agents deliver U.S. dollars to the Central Bank, so that the institution issues the
electronic money that is stored in the electronic accounts (as electronic wallets) within the
Central Bank. Then, users can make payments and transfers to other users. Likewise, users may
withdraw U.S. dollars from their electronic accounts from macro-agents’ contact centres.29

The regulation includes a money limit amount in the electronic account for physical-users of
U.S 9.000 and for companies of US. 15.000. The maximum charging daily limit is of US 500,
and the threshold for withdrawal is of US 2.500. In general terms. service tariffs are also
regulated and vary from U.S. 0.05 to U.S. 0.44.30

Regarding anti-money-laundering provisions, in addition to the limits indicated in the previous

paragraph, the Central Bank has to perform a due diligence review of the electronic money
users at the moment the accounts are opened and can outsource this function.31 Even if the
regulation states specific rulings should be issued on this topic, no new rulings have been
issued. Thus, aspect as ongoing due diligence of the accounts and the types of due diligence
the Central Bank of Ecuador shall apply are not yet regulated.

Likewise, no specific consumer protection norms have been issued. Even if it is the Central
Bank of Ecuador the entity responsible in case that the Central Bank’s platform fails, there are

25
Id.
26
Id.
27
Id.
28
Id.
29
Id.
30
Resolution 73, Dec. 13, 2016, SR 797 (Ecuador).
31
Resolution 274-2016, supra note 24.

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no specifics means of holding this entity accountable in such scenario.32 For instance, there is
no provision that specifically establishes how much time a user has in order to file a complaint
in case money is missing from an account, as well as it is not clear what is the institution that
should address this issue, and also, when it is considered that a platform fails.

4.4. Electronic Money results in Ecuador

In Ecuador, 40% of the population is unbanked33 and 86,4% of households have at least one
cell phone 34. Even if the government aimed to enable the social and economic inclusion of
millions of people, at the same time as strengthening the public finances of the State35, through
the launching of this mobile payment, the results have been poor. Admittedly, even if the
product as such presented several benefits as it being more secure and low-cost and easy to
implement as transactions are done without requiring neither the internet nor a bank account,
economic analysts have described the implementation of the Electronic Money as “really
modest”, despite the government promoting its use by giving back a percentage from the
purchase tax.36 Indeed, until November 2016, the Electronic Money balance in the Central
Bank of Ecuador was just $ 3,8 million dollars.37 200.000 new electronic accounts were created
from July to December, 2016.38 Until June 2017, the total number of electronic accounts was
348.000, through which 3 million transactions were done for an amount of US. 29 million.39

In order to understand these results, and for purposes of the conclusions of this paper, it is
worth noting the following. First, a product very similar to the Electronic Money was intended

32
Id.
33
Expreso, El 40 % no está bancarizado en el país [40% of the population of Ecuador is unbanked] EXPRESO
(Aug. 9, 2014), http://www.expreso.ec/historico/el-40-no-esta-bancarizado-en-el-pais-FAGR_6767215.
34
INEC, Tecnologías de la Información y Comunicaciones (TIC´S) 2013 [TICS in Ecuador]
http://www.ecuadorencifras.gob.ec/documentos/web-
inec/Estadisticas_Sociales/TIC/Resultados_principales_140515.Tic.pdf (last visited Dec. 6, 2017).
35
Central Bank of Ecuador, https://www.bce.fin.ec/en/index.php/electronic-money-system (last visited Dec. 12,
2017).
36
See Alberto Acosta Burneo in Saldo de dinero electrónico creció $ 3 millones en Ecuador en el 2016 [Electronic
Money balance in Ecuador increased $ 3 million in 2016], EL UNIVERSO (January 3, 2017),
https://www.eluniverso.com/noticias/2017/01/03/nota/5978242/saldo-dinero-electronico-crecio-3-millones-
2016.
37
Id.
38
Id.
39
El Telegrafo, BCE: "El dinero electrónico no es una moneda paralela" [Electronic Money is not a parallel
currency] EL TELEGRAFO (June 14. 2017), http://www.eltelegrafo.com.ec/noticias/economia/8/bce-el-dinero-
electronico-no-es-una-moneda-paralela.

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to be launch by a private company in 2011 in Ecuador40; however, the Ecuadorian government
decided to make it a product that could only be offered by the State, as has been discussed in
this paper. Also, article 94 of the Monetary and Financial Code includes a so call “moneda
electronica” which can be described as a digital currency41, which we would not discuss in this
paper. Thus, some of the poor performance of the Electronic Money may be blamed on the fact
that Electronic Money lack confidence from the citizenship because, being a dollarized country,
the Electronic Money platform could serve to issue “moneda electronica”, this is money in an
inorganic manner, without support in US dollars, in order to pay salaries to officials and
suppliers of the State.42

5. A comparative Experience:

5.1.Africa: Kenya

In 2007, Kenya’s largest mobile-network operator (Safaricom) launched its mobile-money

system “M-Pesa”, which is nowadays used by more than 17 million people in that country, and
it is considered the most successful money transfer service in the world. 43 This occurred after
authorities conducted a financial access survey that revealed that there was a considerable low
level of access to financial services in that country.44

The system works in the following way: users have to sign up to the system, after which people
handle the cash to agents of the mobile operator that credit the cash to the M-Pesa’ account. 45
To withdraw money, people have to go to another agent that verifies the account’s balance and

40
See Patrick Nixon, ¿Banca móvil? La clave está en la billetera móvil, según YellowPepper, [e-wallets are the
key] BNAMERICAS (Dec. 29, 2010) http://www.bnamericas.com/es/features/banca/Banca-movil-La-clave-esta-
en-la-billetera-movil,-segun-YellowPepper1 (the report mentions that in 2010 the company Yellowpepper
received the authorization from Ecuador to launch in 2011 the platform for the mobile wallet service).
41
Furthermore, non-state digital currencies are banned in Ecuador, since article 98.3 of the Monetary and Financial
Code determines that it is generally prohibited to use and accept currencies that are not authorized by the Monetary
and Financial Regulatory Body. Indeed, the violation of such prohibition may be considered as a criminal offense
and non-authorized currencies and products bought with those non-authorized currencies may be confiscated. This
means that, for instance, cryptocurrencies such a Bitcoin are forbidden in Ecuador.
42
Pedro Maldonado & Washington Paspuel, El dinero electrónico con 4 temas pendientes [Electronic money has
four pending issues in Ecuador], EL COMERCIO (Apr. 7, 2016, 12:54)
http://www.elcomercio.com/actualidad/dinero-electronico-ecuador-temas-pendientes.html.
43
The Economist, Why does Kenya lead the world in mobile money?, THE ECONOMIST (Mar 2, 2015)
https://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18.
44
Mercy W. Buku & Michael W. Meredith, Safaricom and M-PESA in Kenya: Financial Inclusion and Financial
Integrity, 8 Wash. J. L. Tech & Arts 375, 387 (2013).
45
The Economist, supra note 42.

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delivers the cash. Money can also be transferred between people by using cell phones, so this
is an efficient, faster and convenient way to proceed with payments.46

Therefore this electronic money can be transferred and destined to purchase goods and services
or withdrawn through a simple interface.47 This mobile money system owes it success to the
fact that (i) previously to this system people conducted transfers at commercial banks, post
offices and local courier services, all of which were very expensive; (ii) also due to a large
number of young people that have access to cell phones.48 As a result, M-Pesa helped to transfer
nearly five billion dollars per year, which represented an average of 17 percent of Kenya's
GDP. 49

Furthermore, another element that contributed to M-Pesa’s development and success was that
the system benefitted from almost non-existent regulation by the Central Bank of Kenya, which
provided for other than financial institutions to offer this product and for the competition to
continue growing.50 Indeed, the Central Bank of Kenya cooperated with the mobile operator
by acknowledging that pre-mature regulation of projects similar to M-PESA would might
supress its development. 51 Consequently, the Central Bank of Kenya did not impose any
regulation to the pilot program; only afterwards, in 2011, the regulatory approach that the
government took was of not applying conventional banking law to mobile payment providers,
but instead, issued guidelines for the entire sector of mobile payments.52 For instance,
electronic money issuers that held funds for its customers were required to keep an specific
core capital in relation to the amount of transactions.53 Afterwards, the National Payment
System Act was issued which regulated all payment service providers, where the Central Bank
oversaw the service’s efficiency and security.54 Also, only since 2009, when the Anti Money
Laundering Act was issued, and money laundering criminalized, mobile money operators had
to deal with this sort of risk.55

46
Id.
47
Catherine Martin, Mobile Banking: The answer for the unbanked in America?, 65 Cath. U.L. Rev. 221, 239-
241 (2015).
48
Id. at 241.
49
Id. at 240.
50
Id. at 241.
51
Id.
52
Buku & Meredith, supra note 43, at 395.
53
Id.
54
Id. at 396.
55
Id. at 395-396.

10

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The effects of this well-developed Fintech product can still have impact on an economy.
According to a study conducted by MIT economist Tavneet Suri, M-Pesa helped to reduce
poverty in Kenya by increasing daily per capita consumptions in household, which has
especially helped an estimated 185,000 women.56 Likewise, according to the study a safer
storing of money can lead to improved financial management and savings, and has permitted
for women to take occupations like business rather than farming.57

5.2. Asia: Bangladesh

In Asia, Fintech expansion was impacted considerably by innovations on payments

innovations, where banks wanted to also take a stance; however, instead of competing, Asian
banks decided to partner with Fintech companies and rely on them for development of digital
technologies for financial innovations that would decrease costs and enhance customer
experience.58

For that purpose, governments and regulators in Asia gave Fintech companies the support
needed to develop solutions for banks; this relationship also benefited Fintech firms, since
banks could provide them with an opportunity to gain access for increasing larger
markets.59Nevertheless, solutions provided by banks did not sufficiently address the issue of
unbanked population or low-income families that did not have access to the required
conventional financial technology services to make payments in a formal economy.60

Bangladesh´s “bKash” was precisely a Fintech only solution that addressed this issue and aided
to promote financial inclusion by mobile payments in a country with a population of 160
million, where 70% percent did not have access to a bank account. This product was released
in 2011 by a subsidiary of the BRAC Bank in Bangladesh, in order to give financial access to
the banked and unbanked population in the country to make mobile payments and transfers.61

56
Rob Matheson, Study: Mobile-money services lift Kenyans out of poverty, MIT NEWS (Dec. 8, 2016),
http://news.mit.edu/2016/mobile-money-kenyans-out-poverty-1208#.Wgtg6w2sMsE.email.
57
Id.
58
International Finance Corporation, How Fintech is Reaching the Poor in Africa and Asia: A Start-Up
Perspective, EMCompass Note 34 WORLD BANK GROUP (March, 2017).
https://www.ifc.org/wps/wcm/connect/f745fd31-a9aa-4736-b0ba-
4ac2956f96dc/EmCompass+Note+34+DFS+and+FinTech+Mar+28+FINAL.pdf?MOD=AJPERES.
59
Id.
60
Id.
61
Id.

11

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In order to use this service, a user has to register with his cell phone to “bKash” and will receive
a mobile wallet that functions as a bank account, through which users deposit electronic money
that is charged by going to a representative at one of the network retail points.62 This allows
users to do payments and peer-to-peer transactions, as wells as other services without using the
internet63. Since it is not required for people to previously have a bank account to access to
“bkash” services, this has provided non-banked population to use a new accessible payment.

Furthermore, “bKash” is being used by over 17 million people in Bangladesh, handling more
than 70 million operations daily operation in that country, 22% percent of adults already using
mobile money, and 80% of transactions are done by using “bKash”.64 Likewise, transaction
per month has increased from USD 680 million in 2013 to USD 1.05 billion in 2015, the result
of many more businesses accepting this mobile payment in a ratio of 50 times from 600
merchants to 30,000 that now accept it. 65

One of the reasons for “bkash” success in Bangladesh was that the country’s regulator,
Bangladesh’s Central Bank, provided a flexible and supportive regulatory environment that
resulted in the issuance of a license to BRAC Bank to introduce bKash.66 Initially in 2008
regulators considered that nonbanks and particularly mobile network operators would not offer
financial services; however, in 2011, regulations allowed banks to set up subsidiaries that could
partner with other companies for mobile financial services which permitted this new type of
business to operate, since banks do not necessarily have sufficient experience for such task, but
at the same time being regulated by banking norms.67 Importantly, the country’s Central Bank
and later on the telecommunications regulator promoted that mobile operators allow access to
channels of mobile network operators, which has allowed that similar services be connected
among them different carriers.68

62
See BKash, https://www.bkash.com/products-services/payment (last visited Dec. 10, 2017); See also
https://www.bkash.com/products-services/cash-in (last visited Dec. 10, 2017).
63
International Finance Corporation, supra note 57.
64
Id.
65
MS Rayed & Shatabdi Biswas, Bkash: Tip of the Iceberg, THE DAILY STAR (April 09, 2017, 3:04pm),
http://www.thedailystar.net/next-step/features/bkash-of-tip-the-iceberg-1387663.
66
Gregory Chen & Stephen Rasmussen, bKash Bangladesh: A Fast Start for Mobile Financial Services, CGAP
brief 90952 WORLD BANK GROUP 3 (Jul. 2014),
https://openknowledge.worldbank.org/bitstream/handle/10986/20262/909520BRI0Box30Bangladesh0July0201
4.pdf?sequence=1&isAllowed=y.
67
Id.
68
Id. at 4.

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5.3. U.S regulatory overview

In spite of the fact that the U.S is not an emerging economy, the following overview is
presented just to introduce a more complex legal framework that may apply to mobile payments
in more matured markets, and that may not result convenient for developing economies such
as the ones mentioned in previous sections.

Indeed, mobile payments in the U.S. have evolved in a different way than in the emerging
markets. This industry might not have been adopted as fast as in other places in the world, and
there may be several reasons for this: first, it seems that there is fear from consumers to use
mobile payments because of security concerns of this technology; second, consumers in the
U.S. already have an efficient payment system that does not create an incentive for trying other
payment mechanisms.69

Nonetheless, the general overview of the regulatory scheme that may apply to mobile payments
in the U.S is very complex because the way consumers use a product can determine the
applicable law.70

To begin with, there are several federal agencies that have a key role in payment activities. For
instance, the Consumer Financial Protection Bureau (CFPB), has the task of regulating “unfair,
deceptive, or abusive practices” 71, which may arise on mobile payments regulations. Other
financial regulators might also have a stake on mobile payments, for example: the Federal
Deposit Insurance Corporation, the Federal Reserve System, the National Credit Union
Association, the Office of the Comptroller of the Currency, the Federal Communications
Commission, the Federal Trade Commission, and the Financial Crimes Enforcement
Network.72

Likewise, there are several statutes that may govern mobile payments. It is unclear if such
payments are regulated by Regulation Z73, which was issued by the Federal Reserve Board for
credit card transactions, but that could also address mobile payments relating to matters like
responsibility for unauthorised transaction and initial disclosure making.74 In respect to

69
See Sivon, supra note 11, at 20.
70
Frederick H. Miller & Alvin C. Harrell, THE LAW OF MODERN PAYMENT SYSTEMS, 948 (2nd ed. 2017).
71
Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. § 5511 (2011).
72
Cervone, supra note 15, at 127-128.
73
Truth in Lending Act, 12 C.F.R § 1026 (1968).
74
Id.

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consumer protection, the Electronic Fund Transfer Act75 protects consumers against losses
resulted from an electronic fund transaction that is not authorised; however, it is not determined
whether it is applicable to non-financial institutions such as mobile operators.76

Similarly, other statutes that may apply are the Graham-Leach Bliley Act77 which may also
result applicable regarding data security to mobile payments providers if these are involved in
financial activities, since the FTC definition of financial institution and non-bank entity that
engages in financial activity is broad. Also, in respect to anti-money laundering rules, mobile
payments services may be required to comply with substantially similar requirements than
banks, as they are considered money service businesses (“MSBs”) under the Bank Secrecy
Act’s78, including maintaining an effective anti-money laundering program and filing reports
such as currency transaction reports.

6. How to regulate electronic money in Ecuador from a comparative experience

As indicated, the mobile payment industry is having an important impact, which is why it has
drawn attention from governments, investors, and the public in general. Fintech can provide
more power to the people by creating opportunities that stem from transparency, cost reduction
as well as access to information.79 However, new opportunities can also imply risks, since
innovation can bring both desirable and undesirable consequences that can impact positively
to certain parties while others bear the negative effects, drawing attention to policy
intervention.80

There has been an ongoing debate on how to regulate Fintech. The main reason is that there is
“uncertainty as to what laws and procedures are applicable to new Fintech companies and
their products”.81 A possible explanation as to why it might be difficult to regulate Fintech
products is because there is no precise formula to regulate innovation without possible adverse
effects, at least at some level. This is why regulatory approach should be cautious, since “[t]he

75
See Electronic Fund Transfer Act, 15 U.S.C. § 205 (1978).
76
Cervone, supra note 15, at128-129.
77
Graham-Leach Bliley Act 15 U.S.C § 6801 (1999).
78
Bank Secrecy Act, 31 U.S.C. § 5330 (2012).
79
Zavolokina, supra note 5, at 1.
80
Jo Ann Barefoot, Disrupting FinTech Law, FinTech Law Rep., SQUARE SPACE 9 (Mar-Apr, 2015).
https://static1.squarespace.com/static/535edb77e4b0cd207fff9e6e/t/554ff231e4b0261b84be36e4/143130270588
0/Fintech1802_AA_Barefoot.pdf.
81
Arner, supra note 1, at 1306.

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importance of financial industry in economic growth raises the importance of financial
innovations”82.

As we have previously mentioned, Kenya’s Fintech product brought financial inclusion to the
country because M-Pesa, a non-financial institution, was able to develop in such market as a
mobile payment system principally, among other reasons, because there was not a regulatory
scheme that oversaw the project.83 First, in place of heavily regulating this product, the
government decided to allow the company to develop without regulatory oversight until the
project had gained sufficient consistency, so that it could be able to manage a future regulatory
frame. Also, Kenya adopted a mobile friendly operator scheme. Instead of requiring banks to
be the entities that provide mobile payments, the government realized that by allowing M-Pesa
to provide its mobile payment solution, financial inclusion of the unbanked population could
be fostered.84

In Bangladesh, on the other hand, despite authorities regulating mobile payment services as a
financial service by applying banking norms, regulators had a friendly approach to the industry
as well, allowing the development of innovation, which fostered the expansion of the mobile
payment service, and which even had the potential of bringing financial inclusion by allowing
unbanked population to use the service.85

Fintech, as mentioned, represents innovation and “[t]his evolution poses challenges for both
regulators and market participants, particularly in balancing the potential benefits of
innovation with the potential risks.”86 Admittedly, those who try to regulate Fintech may face
two issues on how to proceed: the first, implies that regulators might have the complicated task
of trying to apply existing legal norms and regulations to the innovations; while the second is
that regulators might have to adjust the legal norms to deal with the innovations.87 In other
words, under the first challenge regulators might consider applying existing regulations to the
innovation, and on the latter issue, regulators would have to modify the rules so that these could
effectively be applied to the innovation.

82
Zavolokina, supra note 5, at 3.
83
See Martin, supra note 46, at 241.
84
See Buku & Meredith, supra note 43, at 394.
85
See supra section 5.2 on “bkash”.
86
Arner, supra note 1, at 1273.
87
Barefoot, supra note 79, at 9.

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However, before issuing specific regulations, it might be important to consider first if a
regulatory response is indeed necessary or appropriate at such time, and, second, in relation to
which aspects of a product shall a regulation be issued, for instance, if competition in the
market, financial firmness of the providers and consumers need to be specifically taken care
of.88 This may lead to the conclusion that, first, only as long as there is a justifiable goal, a
regulator shall intervene, and second that such intervention needs to be as not disruptive as
possible. Indeed, it is worth considering that premature regulation might be prejudicial, since
while authorities are developing a regulatory scheme to be applied to an innovation, such
product might evolve and not keep its characteristics for long because of the market, or by the
burden of regulations itself, which makes us think that regulators may have not only wasted
resources, but affected the evolution of a certain product in certain scenarios.89

That is why we consider that Kenya’s approach of experiencing how the innovative product
could result before regulating it was accurate since regulators could not have known how the
product was going to be received by the population. Only once the product became noticeable
and widely-used, it was prudent for regulators to intervene by issuing, anti-money laundering
provisions through the Anti-Money Laundering Act, as well as enforcing general provisions
from the anti-money laundering agency, such as “know your customer” practices, due
diligence, watch screening, suspicious reporting, among others.90 This, despite that M-Pesa
itself imposed such standards, and complied voluntarily.91 Likewise, due to constant
collaboration between the project and the regulators, in absence of laws for protection of
consumers, the project developed itself consumer-friendly policies92, which could show the
importance of maintaining good relationships between participants and regulators.

As we have seen in the previous examples, Kenya adopted a flexible mobile receptive
regulation approach that permitted mobile operators to be involved in banking operations.93
Also, in Bangladesh, where despite its authorities were not comfortable initially to let mobile
operators to lead mobile payments, in the end regulators try not to shape the market by allowing
banks to offer such services themselves or for them to choose to establish subsidiaries that

88
See Arner, supra note 1, at 1307.
89
Arner, supra note 1, at 1307.
90
See Buku & Meredith, supra note 43, at 395.
91
See Id.
92
See Cervone, supra note 15, at 127.
93
Id. at 124.

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could partner with other entities to provide mobile payments, as happened with “bkash”94. Both
approaches towards regulation had a positive impact because mobile payment services found
a friendly regulatory environment, either by its initial inexistence (Kenya) or by adapting
banking regulations to fit mobile payment (Bangladesh), without losing the view that
innovations in both countries had to be addressed by regulators in order for them to develop
successfully and with the aim of delivering financial inclusion.

Furthermore, the abovementioned examples illustrate how, in general, conventional regulatory

policy can be influenced by the introduction of innovations and entrepreneurship, even in
respect to a structural regulation. As Professor Cary Coglianesse explains, “Policymakers from
all ends of the political spectrum should be able to unite behind efforts to optimize government,
taking steps to strengthen governmental capacity to match better the most significant trends in
entrepreneurship and economic growth.”95

Indeed, both countries, Kenya and Bangladesh, seem to have had few regulators addressing the
mobile payments industry, i.e. their respective Central Bank and the telecommunication
organism. This situation might have also helped to the development of those nation’s markets
as having a simple or single regulator might be conducive to a better and compliant relationship
with authorities, contrarily to what may happen when there are multiple regulators and their
competence rules are complex. For instance, as mentioned in a previous section, the United
States, due to its developed and mature market, has an atomized regulatory framework
composed of several institutions that may act as regulators for mobile payments.96 This scheme
may be not necessarily convenient for developing countries, since having many regulatory
bodies may likely generate investors an impression of either uncertainty of the regulatory
applicable framework because of the many existing agencies, or overregulation.

Having said this, we might argue that Ecuador’s approach towards its mobile payment project
has proven not to be appropriate so far. For one thing, as explained, the law establishes that
only the state is authorised to issue electronic money.97 However, comparative examples from
other emerging countries like Kenya and Bangladesh have shown that states should support

94
Chen & Rasmussen, supra note 65, at 3.
95
Coglianese, Cary, Optimizing Government for an Optimizing Economy (2016). Faculty Scholarship. Paper 1646.
Page 1, http://scholarship.law.upenn.edu/faculty_scholarship/1646.
96
See Miller & Harrell, supra note 69, at 948.
97
See Resolution No. 274-2016, supra note 24.

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innovation by having a regulatory scheme that creates an environment capable to attract
competing private investments from different industries, including non-financial providers, to
mobile payment industry.

With this background, a new approach towards Ecuador’s regulation of Fintech product
electronic money may demand firstly, that the abovementioned law be amended so that private
participants be allowed to issue electronic money, instead of the current situation where the
Ecuadorian state is the only authorized to do it and has monopolized such product.98 This
suggested approach should be taken specially if the government’s goal is to achieve financial
inclusion of unbanked population, since one of the main obstacles that electronic money has
faced in Ecuador’s population is citizen’s lack of trust in the project because, as mentioned in
previous sections, of the government ability to issue inorganic money without being backed by
the U.S. dollar.99

Under such circumstances, once private entities enter the electronic money market in Ecuador,
another approach that may be considered would be for the government not to impose an early
regulatory scheme on the innovation, so that authorities could let the product develop itself,
since the product might evolve in an uncertain way and issued regulations would not have a
further purpose.100 This would follow Kenya’s Fintech product approach to wait during the
innovation’s implementation, before imposing regulations.101 Indeed, as mentioned by Arner,
technology requires time to find its final usage and applicability and the market requires time
to adjust before regulatory intervention.102 If electronic money in Ecuador has so far not been
able to be adopted by a considerable portion of the country’s population, this situation may
show that such market has not settled yet. 103

Only after, non-stringent and industry- specific antimoney-laundering provisions could be

incorporated, as well as industry- specific consumer protection policies, that assure that if
electronic money is substracted or lost from users’ electronic accounts, the electronic money
provider should compensate to the user for such loses. Admittedly, a proportional regulatory
and legal environment for electronic money should be encouraged because despite mobile

98
Such inference can be said from Resolution 274-2016.
99
This was explained in supra section 4.4 on Ecuador’s electronic money results.
100
See Arner, supra note 1, at 1307.
101
This was explained in supra section 5.1 on Kenya’s approach.
102
Arner, supra note 1, at 1307.
103
See supra section 4,4 on Ecuador’s electronic money results.

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payments may generate hazards to the financial system, electronic money could also offer a
valid tool for financial inclusion.104

Likewise, if Bangladesh’s approach is taken by Ecuador, by considering electronic money as a

financial service, and therefore applying banking norms, Ecuador´s regulators should also
allow banks to establish special purpose companies-where banks could partner with other
institutions with experience in mobile payments-which is a friendly approach to allow the
development of the innovation, without imposing heavy burdens to the product’s
development.105

Furthermore, if mobile operators, banks, as well as other interested participants are allowed to
issue electronic money and compete among themselves, this would benefit users to receive
access to more efficient financial services, since it is common knowledge that competition
makes the most capable participants to remain in the market.

Additionally, another approach that could be analyzed, where innovation is encouraged, but
that has not been applied to electronic money, could be seen in Singapore. The country’s
Monetary Authority (MAS) issued on June 2016 a proposal of regulatory sandbox guidelines
in order to foster innovation and expansion of Fintech, which was explained in the following
way:
“Under the proposal, an applicant can apply to MAS for approval to operate a Sandbox
to launch innovative FinTech solutions for a limited duration and within limited
parameters (with appropriate safeguards to contain any consequences of failure) and
where MAS may, on a case by case basis, relax legal and regulatory requirements to
which a FinTech solution may otherwise be subject. At the end of the Sandbox period,
the requirements relaxed by MAS will expire as the applicant exits from the
Sandbox.”106

Afterwards, the participant is allowed to implement its Fintech innovation and will likely be
able to comply with regulations of the industry. Therefore, a sandbox approach could be
considered useful for regulators because it allows participants to operate live experimentations

104
See Cervone, supra note 15, at 135.
105
This was explained in supra section 5.2 on Bangladesh.
106
Rosabel Ng et al., Inside and outside Singapore′s proposed FinTech regulatory sandbox: balancing supervision
and innovation, 10 JIBFL 596 (UK) (2016) (Lexis).

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in a controlled atmosphere where the regulator still exercises some degree of supervision.107
This approach has also been undertaken by other countries like Bahrain, India and Malaysia.108
By using this mechanism, regulators can deal with innovation’s development of start-ups that
do not comply with a regimes current regulations, therefore, legal and regulatory requirements
are relaxed.109

However, a Sandbox approach may have drawbacks, since for this mechanism to proceed, at
least in Singapore, the authority must previously determine if the project will pose an
innovation or benefit society, which is a subjective and premature consideration given that the
project has not even been developed.110

Therefore, a sandbox approach could seem convenient in Ecuador (to enhance innovation in
the country’s electronic money in the event it was issued by privates) as long as the country´s
authorities consider that private electronic money projects will pose an innovation and benefit
society. However, we consider that this mechanism might not be feasible if Ecuador kept
stringent rules that, after the sandbox period finishes, may deem the fintech electronic money
product to failure, due to existing inappropriate regulations that might not be suitable for
electronic money.

7. Conclusions

As we have briefly discussed in this paper, Fintech has been driven by innovation, and specially
in emerging markets its impact has been a tool that could allow economies to achieve financial
inclusion.

Mobile-payment Fintech products from Kenya and Bangladesh may be studied as compelling
models where friendly regulatory frames have helped developing countries to enhance its
citizens’ life quality and foster their respective economies by taking advantage of electronic

107
Id.
108
Ivo Jenik, Regulatory Sandboxes: Potential for Financial Inclusion? CONSULTATIVE GROUP TO ASSIST THE
POOR (Aug. 17, 2017), http://www.cgap.org/blog/regulatory-sandboxes-potential-financial-inclusion.
109
Rosabel, supra note 105.
110
Id.

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 money. On the contrary, the U.S. mobile-payments frame seems relatively complex for
developing countries.

Ecuador’s state-run electronic-money Fintech product, however, has showed unsuccessful

results in comparison to its peer developing countries, given that its citizens have not trusted
the state with such task.

A different approach to Ecuador’s regulation of electronic money is advisable by taking Kenya

and Bangladesh’s as examples of how private initiatives of mobile payments should be
conducted. Ecuador should amend its legal frame under which currently only the state can issue
electronic money, and, therefore, allow privates to issue electronic money in a friendly-
regulatory scheme that should encourage private innovation and achieve financial inclusion.

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