Should your crypto business get E-money license?

  • May 5, 2019

Learn which crypto business needs E-money license, which one needs Payment institution license and which one needs no license.

If you are swimming in a crypto business world, having a centralized service or application for selling goods or services, you are most probably using fiat money to attract the general public. If you are not using fiat money then this post does not refer to you. However. Every business wants to attract new users and every businessman knows that attracting new users by not changing majorly their routine (enabling them to use fiat money) is the way to go – at least for now. So you might be considering using fiat on your platform as well. But as you know being a so-called fiat gateway brings certain regulatory restrictions and conditions onboard, especially licensing requirements.

In this post, I will debate over European e-money license and payment institution license, and try to help you with the understanding of the two licenses, in which cases you need them and in which cases you don’t.

Payment service versus E-money institution

Payment institution under PDS2 Directive (Directive 2015/2336/EU) offers services of execution of payment transactions, including credit transfers and direct debits, issuing or acquiring payment instruments, money remittances, foreign exchange services, and similar services. Executing payment transactions does not mean accepting money for the exchange of goods in terms of the contract of purchase/sale.

The companies that apply for this license are money remittance businesses, credit card processors, payment account operators, issuing and acquiring payment institutions, foreign exchanges of fiat money, payment initiation services (Paypal), etc. In a simple language, such companies are processors of electronic money and transactions of such money. This type of business needs a respective Payment Service Institution (PI) license.

E-money institution under EMI Directive (Directive 2009/110/EC) is a business similar to a payment service, but with one important difference. E-money institution (EMI) can, in addition to the service provided by payment institution, issue electronic money (the digital equivalent of cash stored on an electronic device or remotely on a server). EMI is allowed to issue IBAN accounts, payment cards, e-wallets and other payment instruments requiring storage of the funds of clients.

Now, there have been different interpretations of the PSD2 and EMI directive regarding which licenses should be obtained if a certain payment service stores fiat assets (e-money) of users for a longer period of time. The answer lies in the nature of the deposit, and in the purpose of payment account and future transactions.

Before I go into nature and purpose of the transactions, I will break down the rules of the Payment institution license, and help you understand the logic behind the licenses. Then I shall draw a parallel with the nature and purpose of EMI and the nature and purpose of PSI accounts and transactions.

Let’s breakdown the PDS2

In order to understand when a business shall need EMI license, it is necessary to understand, when it is sufficient to have a PI license.

PSD2 provides in Annex I, that Payment Institution (PI) may carry out the following payment services:

1) Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account;

2) Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account;

3) Execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider:

— execution of direct debits, including one-off direct debits,

— execution of payment transactions through a payment card or a similar device,

— execution of credit transfers, including standing orders.;

4) Execution of payment transactions where the funds are covered by a credit line for a payment service user:

— execution of direct debits, including one-off direct debits,

— execution of payment transactions through a payment card or a similar device,

— execution of credit transfers, including standing orders

5) Issuing and/or acquiring of payment instruments;

6) Money remittance;

7) Payment Initiation services;

8) Account information services.

So, above we have all the services to which PSD2 applies and your services need to have a PI license in order to for your business to be legal. If you accept physical cash or you offer clients to withdraw it, then you need a PI license. Whenever you receive electronic money for future payment for some goods or services that can be identifiable, you have to consider getting a PI license.

Why do we call a future transaction identifiable? Let’s say you deposit your money to an online shoe shop for further purchase of shoes or to a crypto exchange for further purchase of bitcoin, ether, ripple or some other cryptocurrency. You deposited your electronic money to a payment service account, and the deposit can be used only for purchasing shoes/bitcoins/ethers, or you can withdraw money back to your bank account or credit/debit card. The purpose of your deposit was made for an identifiable transaction – future purchase of bitcoins, ethers or shoes. Nothing else can be purchased with that money. The deposit of your funds has an identifiable purpose.

In such a case, an online service needs to have a PI license. If such online service processes payments on its own then a company behind a service needs to obtain a PI license itself. If the payment transactions are handled via the third party payment processor then such third party (or its external processors) should have a PI license.

Now that we know what payment services are we have another question to answer, namely, for how long (after the “deposit” of funds) can the funds be kept on a payment account? Some argue that the payment account cannot hold funds for a longer period of time, or should keep the funds only for a few minutes, 24 hours tops, and then transfer it forward to execute the purpose for which the funds were deposited. I argue that this is not so black and white.

Article 18 (2) of the PDS2 provides that “When payment institutions engage in the provision of one or more of the payment services, they may hold only payment accounts used exclusively for payment transactions. Any funds received by payment institutions from payment service users with a view to the provision of payment services shall not constitute a deposit or other repayable funds within the meaning of Article 5 of Directive 2006/48/EC, or electronic money within the meaning of Article 1(3) of Directive 2000/46/EC.”

In case a payment institution holds (stores) funds on the payment account, such funds can be kept safe for some period of time, of course only if the funds are meant exclusively for the payment transaction of certain service. However, the funds should not be held for longer than is necessary for technical and operational purposes. Some say that the funds cannot be held (stored) by a PI on the payment account unless the “deposit” is accompanied by a payment order for a certain onward transfer, which can then be executed immediately or in the future. I argue that this is not true if the transaction is identifiable and the money has a purpose and cannot be used for any other purpose than that particular one. So, in the sense of the PI, the word “deposit” has a different meaning and purpose, and therefore it is not a deposit account in the meaning of EMI (depositing and saving money, earning interest on the deposited money, etc.).

In the above-given case of an online shoe shop or a crypto exchange, having a PI license (or having a third-party payment processor with a PI license), the funds of shoppers or crypto exchange users can be stored at a payment service account for some period of time, under the condition that such funds are stored for an exclusive and defined transaction sometime in the future. No other transactions (saving, paying utilities, receiving wage) is allowed under such account. This is why the PI accounts are called payment accounts and serve as a save passage of money for a certain transaction.

In terms of the PDS2, payment institutions are allowed to:

  • open and maintain payment account of its users,
  • receive, keep and safeguard funds from the users for the purpose of payment services, without considering this as e-money or bank account deposits,
  • hold users’ funds, which are in relation to payment transactions.

What about the cash?

Payment service institution is a service that enables cash to be placed on a payment account and cash to be withdrawn from the payment account, however, the following services do not fall within the scope of the PSD2:

  • Payment transactions made in cash since a single payments market for cash already exists nor to payment transactions based on paper cheques.
  • Payment transactions consisting of the non-professional cash collection and delivery within the framework of a nonprofit or charitable activity.
  • Money exchange business, that is to say, cash-to-cash operations, where the funds are not held on a payment account.
  • Services where cash is provided by the payee to the payer as part of a payment transaction following an explicit request by the payment service user just before the execution of the payment transaction through a payment for the purchase of goods or services.
  • Services by providers to withdraw cash by means of automated teller machines acting on behalf of one or more card issuers, which are not a party to the framework contract with the customer withdrawing money from a payment account, on condition that these providers do not conduct other payment services as listed in the Annex.

The purpose of deposits & nature of EM and PI transactions

Every crypto business is at one point faced with the question of licensing. And it is a well-known fact that EU licenses are expensive, demand a certain amount of money for initial capital, legal and application costs, and qualified human resources, to get it. The Payment institution license requires an initial capital of 125.000 EUR, whereas E-money institution license requires an initial capital in the amount of 350.000 EUR. And this is just a beginning. Not having an appropriate license can lead to excessive fines, which can cause bankruptcy of your business.

Due to such strict (and for many businesses outstanding) conditions, many of the crypto exchanges and trading platforms are using external, licensed and trusted e-money institutions (for depositing money that can wait on the account until being used for purchase of crypto) and payment service providers (for processing credit and debit cards and other payment methods). Note, that this license (or third party processor) is needed only when a business operates with fiat money, meaning accepting fiat money for the future transactions and enabling users to withdraw fiat to their bank accounts.

So, which future transactions call for E-money license, and which ones for Payment institution license?

If the funds are deposited on user’s (deposit) account and kept there for some indefinite future use (purchases of food and clothes, transfers to other bank accounts, payment of utilities, ATM withdrawals, saving, receiving wage) then such money processing calls for EMI license. Entity with such a license can issue IBAN accounts and all sorts of payment cards.

If the funds are transferred to a payment processor and kept there for some time for a future identifiable transaction then such money processing calls for PSI license. In case of a payment account, the purpose of a “deposit” has to be pre-defined, payment account transactions are limited to a pre-defined purpose, and the payment account is limited to only those transactions.


Having appropriate licenses to operate your business is important. There are different ways to manage and operate your business in a compliant way, and compliance is always cheaper than being non-compliant and trying to avoid costs of licensing, legal costs and everything that goes with it.

Hopefully, this piece showed you in an understandable manner the differences between the two main European licenses for payment processing. If you are still not sure whether you need a license or not, or whether you are in a process of getting one, you can contact us here: [email protected] for further support.

If you need a fintech lawyer, contact us here.

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