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4000 - Advisory Opinions
Question if an electronic banking product would be considered a
deposit within the meaning of the Federal Deposit Insurance Act
FDIC--97--4
May 12, 1997
Marc J. Goldstrom, Counsel
This is in response to your letter to FDIC Regional Counsel Gerald
Lamberti. In that letter you requested our opinion as to whether Ecash,
a new product being offered by (the "Bank"),
would be considered a deposit within the meaning of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. § 1811 et. seq.).
Background
As we understand from the materials provided and subsequent
conversations with , the Bank has entered into an
agreement with a company incorporated in
, to offer consumers and merchants the opportunity
to participate in the Ecash program. The Ecash program provides a
method of payment from one personal computer to another over the
Internet. Consumers and merchants each pay fees to participate in the
Ecash program.
Under the Ecash system a customer first opens a ("WCA")
account. A WCA account is a money market deposit account with
withdrawal features. 1
The customer may then initiate a transfer of funds from the WCA to the
Ecash Mint. This can only be done by phone, fax, mail, or E-mail
instructions. The Bank establishes an Ecash Mint account for every
customer who transfers funds into the Ecash Mint. The Bank maintains
account records of each customer's Ecash Mint account. Once funds have
been transferred into an Ecash Mint individual account, the customer
can then contact the Ecash Mint over the Internet and download Ecash
from his Ecash Mint individual account onto his hard drive in any
amount up to his existing balance in the Ecash mint
account. 2
As customers download the Ecash to their computer hard drives, the
underlying funds are transferred from individual Ecash mint accounts
into a pooled account ("Ecash Mint Pooled Account"). Only
aggregate records are maintained for the pooled account. Once Ecash is
transferred to the customer's hard drive,
{{2-27-98 p.4984.14}}it can then be transferred to merchants
or other individuals who also participate in the Ecash
program. 3
While the customer perceives that Ecash is paid person to person,
the Bank has a role in almost all transactions. When transferring the
Ecash, in most cases the payor will specifically address the Ecash to
the payee's Ecash account identification. The payee's software
automatically sends the Ecash to the Ecash mint which will verify that
the Ecash is valid and ask whether the payee wishes to accept the
payment. Although not necessarily apparent to the payee, when the
payment is accepted, the Ecash is simultaneously deposited into his
Ecash Mint individual account where he has the option of leaving the
Ecash or downloading it onto his hard
drive. 4
In all transactions over the Internet, the Bank can only identify the
validity of the Ecash and the payee's Ecash Mint individual account.
It is never able to determine the identity of the payor. Indeed, even
in the case of a customer returning unspent coins to the Ecash Mint,
the Bank does not have the ability to link the origination of the Ecash
with a particular customer.
In certain limited circumstances, the payor has an option to send
Ecash through electronic mail ("E-mail") without specifically
linking the Ecash to the intended payee's Ecash account identification
(the "Wild Card
Option"). 5
In such cases, if an unintended payee is able to intercept the E-mail
and deposit the Ecash in his Ecash Mint individual account, there is no
recourse. You have advised us that the Bank recommends that even when
the Wild Card Option is available that it only be used when sending
small amounts of Ecash. When the Wild Card Option is used, it is
possible that the Ecash could circulate in cyberspace prior to
returning these "coins" to the Ecash Mint. If the "coins"
have expired, the Ecash Mint will not accept them and only the original
payor would have the ability to redeem the "coins."
At any time a customer may through his computer return "coins"
to his Ecash Mint individual account. By phone, fax or E-mail the
customer may request that funds be transferred from his Ecash Mint
individual account into his WCA account.
While the Bank pays interest on WCA accounts, it pays no interest on
funds in Ecash Mint accounts regardless of whether the Ecash remains in
the customer's account or whether it has been downloaded onto his hard
drive. Funds in the Ecash Mint are invested by the Bank and all income
earned through such investment remains the property of the Bank.
The Agreement (the "Agreement"), which
every Ecash participant must enter into, specifically states that: (1)
the Ecash Mint is not a deposit with the Bank but represents a general
obligation of the Bank; (2) any "account" set up in the Ecash
system is not a deposit with the Bank but represents cash held by the
customer in its personal computer under the Ecash system; (3) the money
held in the Ecash Mint is not insured by the FDIC; (4) the customer is
an unsecured creditor of the Bank as to all money held in the Ecash
Mint; and (5) the customer will treat Ecash as though it was cash and
that said cash was under "risk of attack." Further, the Agreement
specifically indicates that the software for the Ecash system is being
provided gratuitously by a third party for "testing purposes
only," and that the "customer shall bear all risk of
nonperformance, loss or corruption of data and other problems."
Notwithstanding the foregoing, based on the accessibility of the
funds to the Bank, it is internally treating all funds in the Ecash
system as deposits and they appear as such on the Bank's general
ledger. Moreover, your letter notes that the Board of Governors of the
Federal Reserve ("FRB") are treating such funds as deposits and
requiring that reserves be held on funds in the Ecash
system.
{{2-27-98 p.4984.15}}
Legal Issue
You have asked for our opinion as to whether and to what extent the
funds or obligations underlying Ecash constitute
"deposits" 6
within the meaning of section 3(1) of the Federal Deposit Insurance Act
(FDIA) and are therefore assessable and qualify for deposit
insurance. 7
Analysis
An analysis of whether funds underlying Ecash are considered to be a
part of the institution's assessment base and qualify for deposit
insurance coverage begins with the definition of a deposit under
section 3(1) of the FDIA. This section provides in pertinent part that:
the term "deposit" means--
(1) the unpaid balance of money or its equivalent
received or held by a bank or savings association in the usual course
of business and for which it has given or is obligated to give credit,
either conditionally or unconditionally, to a commercial, checking,
savings, time, or thrift account, or which is evidenced by its
certificate of deposit, thrift certificate, investment certificate,
certificate of indebtedness, or other similar name, or a check or draft
drawn against a deposit account and certified by the bank or savings
association, or a letter of credit or a traveler's check on which the
bank or savings association is primarily liable . . .
(2) trust funds as defined in this Act received or held by such
bank or savings association, whether held in the trust department or
held or deposited in any other department of such bank or savings
association,
(3) money received or held by a bank or savings association, or
the credit given for money or its equivalent received or held by a bank
or savings association, in the usual course of business for a special
or specific purpose, regardless of the legal relationship thereby
established, including without being limited to, escrow funds, funds
held as security for an obligation due to the bank or savings
association or others (including funds held as dealers reserves) or for
securities loaned by the bank or savings association, funds deposited
by a debtor to meet maturing obligations, funds deposited as advance
payment on subscriptions to United States Government securities, funds
held for distribution or purchase of securities, funds held to meet its
acceptances or letters of credit, and withheld taxes . . .
(4) outstanding draft (including advice or authorization to charge
a bank's or a savings association's balance in another bank or
savings association), cashier's check, money order, or other
officer's check issued in the usual course of business for any
purpose, including without being limited to those issued in payment for
services, dividends, or purchases, and
(5) such other obligations of a bank or savings association as the
Board of Directors, after consultation with the Comptroller of the
Currency, Director of the Office of Thrift Supervision, and the Board
of Governors of the Federal Reserve System, shall find and prescribe by
regulation to be deposit liabilities by general
usage. . . .
{{2-27-98 p.4984.16}}
12 U.S.C. § 1813(1).
An analysis under this statute must initially consider how the
funds underlying the Ecash are accounted for within the Bank. As we
understand it, Ecash available to a customer, but not yet down loaded
to the customer's hard drive is represented by funds in Ecash Mint
individual accounts. Ecash that has been down loaded onto a computer
hard drive is represented by funds held in the Ecash Mint Pooled
Account. These two accounts will be analyzed separately.
Funds in Ecash Mint Individual Accounts
For purposes of analyzing Ecash Mint individual accounts, the most
relevant provisions of section 3(1) of the FDIA are subsections (1) and
(3). Synthesizing the requirements of these two subsections, in order
for funds to constitute deposits under section 3(1)(1) or (3) of the
FDIA, 12 U.S.C. 1813(1)(1) &
(3), the funds must represent: (1) An unpaid balance of money or its
equivalent received or held by an institution in the usual course of
business; and (2) either (a) the institution must have given or be
obligated to give credit to a commercial, checking, savings, time, or
thrift account; or (b) the funds must be held for a special or specific
purpose.
Ecash obligations accounted for in Ecash Mint individual accounts
represent funds held or received by the Bank in the usual course of
business. At issue is whether the Bank gave or was obligated to give
credit to a commercial, checking, savings, time, or thrift account with
respect to such funds; or, alternately whether such funds are held for
a special or specific purpose.
The Bank must have given or be obligated to give credit to a
commercial, checking, savings, time or thrift account
To be a deposit under section 3(1)(1) of the FDIA, 12 U.S.C.
§ 1813(1)(1), money or its equivalent must not only be held or
received by an institution in the usual course of business, but must
(unless another alternative condition is satisfied) be a payment for
which the institution has given or is obligated to give credit to a
commercial, checking, savings, time or thrift account. These funds have
been credited to an Ecash Mint individual account. The issue is whether
such an account is a commercial, checking, savings, time or thrift
account within the meaning of section 3(1)(1) of the FDIA, 12 U.S.C.
§ 1813(1)(1). Arguments may be advanced both in support of and
against this proposition. However, we need not resolve the matter
because, as will be discussed in the following section, we are of the
opinion that funds underlying Ecash in an individual's Ecash Mint
account are held for a special or specific purpose and therefore are
considered a deposit within the meaning of section 3(1)(3) of the FDIA,
12 U.S.C. § 1813(1)(3).
Alternatively, The Funds Must Be Held for a Special or
Specific Purpose
In order to be considered a deposit under section 3(1)(3) of the
FDIA, 12 U.S.C. § 1813(1)(3), the funds credited to an Ecash Mint
individual account must represent: (1) money or its equivalent (or the
credit given for money or its equivalent) received or held by an
institution in the usual course of business; (2) for a special or
specific purpose. The first requirement is satisfied and the issue is
whether the funds underlying the Ecash credited to an Ecash Mint
individual account are being held for a special or specific purpose.
Congress included in the statute, without limitation, the
following examples of a bank or savings association holding funds for a
special or specific purpose: "escrow funds, funds held as security
for an obligation due to the bank or savings association or others
(including funds held as dealers reserves) or for securities loaned by
the bank or savings association, funds deposited by a debtor to meet
maturing obligations, funds deposited as advance payment on
subscriptions to United States Government securities, funds held for
distribution or purchase of securities, funds held to meet its
acceptances or letters of credit, and withheld taxes. . . ." 12
U.S.C. § 1813(1)(3). While Congress included these examples
of
{{2-27-98 p.4984.17}}special or specific purposes for which
money may be held to qualify as a deposit, the clause "without being
limited to" means that the section does not state each and every
such purpose.
The question of what constitutes a special or specific purpose
deposit was addressed in General
Counsel Opinion No. 8 adopted by the FDIC Board of Directors on
July 16, 1996 (copy
attached). 8
While the opinion concerns stored value cards, its principles apply
equally to a stored value computer network payment product such as
Ecash. 9
General Counsel Opinion No. 8 opines that if the purpose for which
an institution is holding funds is at least as specific as the purposes
enumerated under section 3(1)(3) of the FDIA, such funds may be
considered deposits. 10
The opinion then examines the purpose for which funds underlying
certain stored value card systems are held. With respect to Ecash, the
purposes associated with Bank Primary--Reserve
Systems 11
and Bank Secondary--Advance
Systems 12
are instructive.
Funds underlying Bank Primary--Reserve Systems are held by an
institution to meet obligations to payees as they make claims on such
funds pursuant to general or miscellaneous unrelated transactions
undertaken within the stored value card system. This purpose if
fundamentally different from the examples listed in section 3(1)(3) of
the FDIA and the cases holding that certain funds are deposits within
the meaning of this
section. 13
The examples in the statute and the cases holding funds to be deposits
under section 3(1)(3) of the FDIA, involve funds held for a purpose
associated with a specific transaction (or two or more related
transactions). Funds held by an institution to meet obligations to
transferees in a Bank Primary--Reserve System is not as specific a
purpose as the examples in the statute and in the cases finding deposit
liabilities under section 3(1)(3) of the
FDIA. 14
Therefore, such funds would not be held for a special or specific
purpose within the meaning of section 3(1)(3) of the FDIA, 12 U.S.C.
§ 1813(1)(3). Conversely, funds held in a Bank Primary--Reserve
System could be considered held for a special or specific purpose if
the system is structured so that the ultimate payee can only be one
predetermined specific
party. 15
In the case of Bank Secondary--Advance Systems the funds are being
held or received by the institution in order to pay a third party in
consideration of the electronic value transferred by such third party
to the institution and ultimately its customer. Thus, like the examples
listed in the statute and the cases finding monies to be deposits under
section 3(1)(3) 16
, these funds are linked to a specific transaction. Thus, in the case of
Bank Secondary--Advance Systems, the funds being held or received in
order to pay the third party may be considered held or received for a
special or specific purpose within the
{{2-27-98 p.4984.18}}meaning of section 3(1)(3) of the FDIA,
12 U.S.C. § 1813(1)(3) and may therefore qualify as a deposit.
Applying these principles to the funds underlying Ecash Mint
individual accounts, it would appear that such funds are being held
either to be transferred to the Ecash Mint Pooled Account (at the time
the Ecash is downloaded to the customer's hard drive) or transferred
to the customer's WCA account. In either case, they represent an
obligation owed to a predetermined specific party, the Bank's
customer. Moreover, the funds at issue are associated with only two
possible transactions. Accordingly, we are of the view that the purpose
for which the funds underlying Ecash Mint individual accounts appear to
be as specific a purpose as the examples in the statute and in the
cases finding deposit liabilities under section 3(1)(3) of the
FDIA. 17
Therefore, in our view such funds would be held for a special or
specific purpose within the meaning of section 3(1)(3) of the FDIA, 12
U.S.C. § 1813(1)(3), and may therefore qualify as a deposit under
such section.
Funds Transferred to Ecash Pooled Account
As indicated in the foregoing section, the principles discussed in
General Counsel Opinion No. 8 apply equally to a stored value computer
network payment product such as
Ecash. 18
In Bank Primary--Reserve Systems (discussed in the foregoing section)
as value is downloaded onto a card, funds are withdrawn from a
customer's account (or paid directly by the customer) and paid into a
reserve or general liability account held at the institution to pay
merchants and other payees as they make claims for payments. In our
view, the funds underlying this type of stored value card system are
directly analogous to the funds credited to the Ecash Mint Pooled
Account. As the Ecash is downloaded onto customers' hard drives the
underlying funds are paid into a reserve or general liability account
to pay merchants and other payees as they make claims for payments. The
Bank Primary--Reserve System is exactly like the Ecash system (once the
funds have been transferred to the Ecash Mint Pooled Account), except
that the electronic value is transferred via computer hard drives
rather than stored value cards. Thus, we would view the funds
transferred to the Ecash Pooled Account in the same way as funds
underlying Bank Primary--Reserve Systems.
In General Counsel Opinion No. 8, the General Counsel concluded that
funds held by an institution to meet obligations under Bank
Primary--Reserve Systems would appear not to be deposits under section
3(1)(1) of the FDIA, 12 U.S.C. § 1813(1)(1), because the funds are
not credited to or obligated to be credited to a commercial, checking,
time, or thrift account. The General Counsel further concluded that the
funds underlying such systems are not deposits under section 3(1)(3) of
the FDIA, 12 U.S.C. § 1813(1)(3), because such funds are not held for
a special or specific
purpose. 19
Inasmuch as the funds in the Ecash Mint Pooled Account are directly
analogous to funds underlying Bank Primary--Reserve Systems, we reach
the identical conclusions with respect to these Ecash obligations. They
do not appear to be deposits within the meaning of section 3(1) of the
FDIA, 12 U.S.C. § 1813(1).
Summary
It is our opinion that funds in Ecash Mint individual accounts are
deposits within the meaning of section 3(1)(3) of the FDIA, 12 U.S.C.
§ 1813(1). Such funds
therefore qualify for deposit insurance and may be assessed by the
FDIC.
It is our further opinion that the analysis in General Counsel
Opinion No. 8 with respect to Bank Primary--Reserve Systems applies
equally to funds underlying Ecash that has been transferred to a pooled
account within the Ecash Mint. Accordingly, such funds are not deposits
within the meaning of section 3(1) of the FDIA, 12 U.S.C. § 1813(1).
Therefore the funds would not qualify for deposit insurance and may not
be assessed by the FDIC.
{{2-27-98 p.4984.19}}
We expect that the Bank will clearly and conspicuously disclose to
its customers that funds which have been transferred to the Ecash
System are insured up to applicable limits until the Ecash is
downloaded to their computer at which point such funds are no longer
insured.
Finally, you note in your letter that Federal Reserve officials are
treating Ecash as a deposit for reserve requirement purposes. The
definition of deposit for such purposes is found in a regulation
promulgated and administered by the Federal Reserve Board of Governors.
12 C.F.R. § 204.2. We take no
position on this matter. This letter is intended to address only the
question of whether and the extent to which the Ecash program would be
insured by the FDIC. It is not intended to address any other legal or
regulatory issues or to approve or sanction the Ecash system. The
system may raise other legal and regulatory issues which should be
discussed with other federal agencies or departments.
If you have any further questions, you may contact me at (202)
898-8807.
1A WCA is available to customers independent of the Ecash
program and its status as a deposit is not at issue. It is treated as
and considered a deposit under the FDIA. Go Back to Text
2Prior to transfer, the Ecash is encrypted to provide security.
It is downloaded to the customer's hard drive in the form of digital
"coins". These "coins" are valid for a ninety day period.
However, the customer's software may "refresh" these coins at
any time prior to transfer. Expired "coins" may only be redeemed
by the customer who withdraw them. Go Back to Text
3The Ecash program is a so-called closed system. In other
words, the electronic value may only be transferred to individuals and
merchants who participate in the Bank's Ecash program. Go Back to Text
4Prior to acceptance the customer is asked whether he wishes to
withdraw the Ecash to his hard drive or leave it in the Ecash mint. Go Back to Text
5The Wild Card Option is never available when purchasing
merchandise through a merchant's world wide web site. Go Back to Text
6Whether and to what extent the funds or obligations underlying
Ecash constitute "deposits" within the meaning of section 3(1) of
the FDIA will in large part determine whether such funds are
"insured deposits" under section 3(m) of the FDIA. An "insured
deposit" is that portion of a "deposit" that is insured. It is
the "net amount due to any depositor" for "deposits in an
insured depository institution" (after deducting offsets) less any
part thereof that is in excess of $100,000.
12 U.S.C. 1813(m),
1817(i), and
1821(a). Such net amount is
also determined in accordance with regulations prescribed by the FDIC.
See 12 C.F.R. Part 330. Among other things, this rule
requires that the deposit be unconditionally credited to the deposit
account. Id. at § 330.3(i). Go Back to Text
7This opinion only addresses whether the funds underlying Ecash
constitute deposits under the FDIA. Such determinations are relevant
for assessment and insurance purposes. There are other possible issues,
not addressed by this opinion, which include, but are not limited to,
consumer disclosure matters, systemic risk, security, electronic funds
transfer matters, reserve requirements, counterfeiting, monetary
policy, and money laundering. Go Back to Text
861 Fed. Reg. 40490 (August 2, 1996). Go Back to Text
9Id. Go Back to Text
10Id. at 40493. Go Back to Text
11In stored value card systems of this type, as value is
downloaded onto a card, funds are withdrawn from a customer's account
(or paid directly by the customer) and paid into a reserve or general
liability account held at the institution to pay merchants and other
payees as they make claims for payments. Id. at 40490. Go Back to Text
12In Bank Secondary--Advance Systems the "value" is
created and ultimately held by a third party. As customers exchange
funds for electronic value, the funds are held for a short period of
time and then forwarded to the third party. Id. Go Back to Text
13Id. At 40493. Go Back to Text
14See Seattle-First Bank v. FDIC, 619 F. Supp. 1351,
1360 (Money wired by a loan participant to the lead bank, at the
lead's direction, for the purpose of funding a participated loan can
become deposits within the meaning of 3(1)(3) when the wired funds are
not drawn by the intended borrower. The funds were received for the
special or specific purpose of funding the participated loan);
FDIC v. European American Bank & Trust Co., 576 F. Supp.
950, 957 (Money covering a CHIPS transfer has as specific a purpose as
the money in the accounts listed by the statute. Just like money
deposited to meet maturing obligations, money backing a CHIPS release
is to insure payment to the recipient of the release). Go Back to Text
1561 Fed. Reg. at 40493 note 11. Go Back to Text
16See Note 14 supra. Go Back to Text
17Id. Go Back to Text
1861 Fed. Reg. at 40490. Go Back to Text
19Id. at 40494. See also page 9
supra. Go Back to Text
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