Page 94 - ITU-T Focus Group Digital Financial Services – Recommendations

ITU-T Focus Group Digital Financial Services
Recommendations

Title of recommendation Implementation of measures to safeguard funds
Working Group Consumer Experience and Protection

Theme Protection of Funds
Audience for recommendation Regulators

Regulators should require DFS providers to implement measures to safeguard customer funds, such as full liquid-
ity backing, fund isolation, and ring-fencing.

Regardless of the existence of deposit insurance protection for digital stored-value products, regulators should
require DFS providers to implement specific measures to safeguard customer funds, so as to reduce the risk
of consumers losing their funds in the event of insolvency of a provider of digital stored-value products. These
mechanisms are especially important in countries that apply the exclusion approach or the pass-through
approach, when some DFS providers are not members of the deposit insurance system.

The most common safeguarding mechanism is the requirement for DFS providers to hold funds equivalent to
all digital stored-value in circulation in liquid and safe assets, including government securities or deposits at
several prudentially regulated institutions, especially when digital stored-value exceeds a certain threshold (e.g.
Colombia, Philippines). This requirement may still be insufficient to guarantee that customers will receive the
total amount they kept in digital stored-value products, as customers may only have unsecured claims on the
DFS providers’ assets. For this reason, another important safeguarding mechanism is to require DFS providers
to isolate or separate customer funds from other assets, so that they can only be used for the customer’s
benefit and not for business purposes. This is typically done by placing funds in a trust or a custodial account
(e.g. Kenya, Nigeria), particularly in common-law countries where the legal concept of a trust exists. In civil-law
countries, fiduciary contracts are used for similar fund isolation purposes. Regulators in civil-law countries may
require additional ring-fencing provisions to ensure that customer funds are protected from creditor claims
in the case of insolvency of the DFS provider, the trustee, or the custodian holding such funds (e.g. Paraguay
and Peru).

The CPMI/World Bank’s report Payment Aspects of Financial Inclusion highlights the aforementioned
safeguarding mechanisms among the key aspects of the payment services’ legal and regulatory framework
that are critical enablers of financial inclusion. The GSMA Code of Conduct for Mobile Money Providers
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requires mobile money providers to safeguard customer funds against risk of loss (Principle 1). The BTCA
Responsible Digital Payments Guidelines also indicates the need to safeguard the float for client funds held
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in digital payment accounts (Guideline 2).

53 Better Than Cash Alliance, Responsible Digital Payments Guidelines (2016) https:// www. betterthancash. org/ tools- research/ case-
studies/ responsible- digital- payments- guidelines

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