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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, 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.

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. . . .

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 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 Systems11 and Bank Secondary--Advance Systems12 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 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.

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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