2. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Lecture 12: Internet Payment Systems

3. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Regulation of Money Regulating money and its value are essential to commerce eCommerce permits very rapid movement of money equivalents in large value outside the banking system Electronic forms of money, payment orders and debt do not have the same safeguards as familiar paper forms Risk of hacking, identity theft, etc.

4. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Regulation of Money “The Congress shall have Power … To coin Money, regulate the Value thereof, and of foreign Coin … ” Art I, Sec. 8 “No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts … ” Art. 1, Sec. 10 Money supply: Federal Reserve Bank Banking regulation: Treasury Department Comptroller of the Currency

5. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Opinion of the Attorney General of North Carolina East Carolina University (part of the state university system) wanted 1. students to deposit money with the school to be used with a debit card to buy books, laundry services, etc. 2. to extend the debit card program to other businesses The University asked the N.C. Attorney General for an opinion on legality Opinion: 1 is legal; 2 is not If the University holds funds as a financial intermediary it is a “financial institution” which must be chartered as a bank under North Carolina or Federal laws (and be regulated as such) If the University accepts prepayments for services that it will render itself to a student, it is not an “intermediary” 1993 N.C. AG LEXIS 75

6. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Electronic Cash Debate about whether new form requires new regulation E-cash may be based on software or hardware, and focused on larger or smaller transactions

7. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Regulation of E-cash U.S. Constitution reserves the right to issue to the federal government, and not the states “Private” money is allowed Banks taking deposits are subject to extensive federal or state regulation, other issuers of e-cash may not be

8. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Money Transmitters Entities other than banks may be money transmitters 40 states have laws dealing with money transmitters Uniform Money Services Act –would apply to Internet payment systems –requires licensure, examination, reporting and record keeping

9. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Electronic Fund Transfer Act (EFTA, 1978), 15 U.S.C. §1693ff.15 U.S.C. §1693ff. Protects consumers (individuals) in electronic banking transactions Implemented by Federal Reserve Regulation E (12 C.F.R. §205.1). (Many state versions also.)12 C.F.R. §205.1 Any transfer of funds which is initiated through an electronic means to credit or debit an account: –(1) Point-of-sale transfers –(2) ATM transfers –(3) Direct deposits or withdrawals of funds (ACH) –(4) Transfers initiated by telephone –(5) Debit card transactions

10. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS EFTA (cont.) Regulation E requires: –disclosure of terms –receipt for transaction, periodic statements –limited consumer liability for unauthorized transactions: $50 if reported within 2 business days $500 if reported within 3-60 days unlimited liability after 60 days –error resolution procedure when consumer reports within 60 days of of statement –issuance of access devices only upon consumer request Not clear if Reg. E applies to smart cards

11. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Credit Cards Not covered by EFTA, but by the “Truth in Lending” Act and Federal Reserve Regulation Z (12 C.F.R. §226.1ff.)12 C.F.R. §226.1ff. Primary method of payment for consumer Internet sales Does not apply to credit cards used by businesses Limits consumer liability for unauthorized use to $50 or amount wrongly charged prior to notice, whichever is lower Critical for widespread use of credit cards

12. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Transferable Records (UETA)UETA The law of negotiable instruments (checks, drafts, promissory notes, etc.) pays great attention to transferability and the “holder in due course” (rightful possessor without knowledge of fraud or defect) A negotiable instrument is token money (rightful possession is equivalent to ownership) Negotiable instruments are made electronic through “transferable records” A “transferable record” is an electronic record that would be a negotiable instrument if it were written and which the issuer has expressly agreed is a transferable record.

13. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Transferable Records (UETA)UETA A person ‘controls’ a transferable record if (1) a single authoritative copy of the transferable record exists which is unique, identifiable and,... unalterable; (2) the authoritative copy identifies the controller as either the issuer or as most recent authorized transferee; (3) copies that change the identity of the controller can be made only with the consent of the controller; (4) the status of a copy (authoritative or not authoritative) is readily identifiable. Transferable records have the status of negotiable instruments

14. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Automated Transactions (UETA)UETA “Automated transaction. -- A transaction conducted or performed, in whole or in part, by electronic means or electronic records, in which the acts or records of one or both parties are not reviewed by an individual in the ordinary course [of business].” “A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents' actions or the resulting terms and agreements.” Difference: automated transaction may be revoked for unilateral mistake if the other side has not changed its position in reliance

15. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Automated Transactions (e-Sign)e-Sign “The term ‘electronic agent’ means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part without review or action by an individual at the time of the action or response.” “A contract or other record relating to a transaction in or affecting interstate or foreign commerce may not be denied legal effect, validity, or enforceability solely because its formation, creation, or delivery involved the action of one or more electronic agents so long as the action of any such electronic agent is legally attributable to the person to be bound.”

16. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Wire Transfers Used primarily in business to business transactions Covered by Article 4A4A Commercially reasonable security measures required between bank and customer Complex liability rules for errors, retransmission, etc. in financial messaging systems

17. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Letters of Credit and Documents of Title Documents of Title are issued by a carrier or storage facility and evidence ownership rights in goods Letters of Credit are issued by a bank, at the request of a customer, for a third party’s benefit, to promise that the customer can pay an amount upon the presentation of required documents (such as the document of title)

18. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Bill of Lading (B/L) Transaction 1. BUYER SENDS SIGHT DRAFT TO SELLER, BACKED BY IRREVOCABLE LETTER OF CREDIT 5. BUYER’S BANK PAYS DRAFT TO SELLER’S BANK BUYER’S BANK SELLER’S BANK BUYER SELLER 2. SELLER DELIVERS GOODS AND SIGHT DRAFT TO SHIPPER 7. BUYER’S BANK DEBITS BUYER’S ACCOUNT, GIVES B/L TO BUYER SHIPPER 3. SHIPPER CREATES B/L, SENDS IT WITH DRAFT TO BUYER’S BANK 6. SELLER’S BANK CREDITS SELLER’S ACCOUNT, NOTIFIES SELLER SHIPPER’S DOCK 4. SHIPPER SHIPS 8. BUYER PRESENTS B/L, CLAIMS GOODS SHIPPER IS AN ESCROW AGENT. IF B/L IS NOT PRESENTED, GOODS WILL NOT BE DELIVERED IF SELLER NEVER SHIPS GOODS, SHIPPER WILL NOT GENERATE B/L AND BUYER’S BANK WILL NOT PAY

19. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Electronic Documents of Title and Letters of Credit Letters of Credit are now issued electronically and by means of the Internet. Revised Article 5 of the UCC allows for this. Documents of Title, e.g. negotiable bills of lading, still must be in writing, so the electronic issuance and negotiation is unclear.

20. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS EU Electronic Money Directive Directive on the Taking-up, Pursuit and Prudential Supervision of Business of Electronic Money Institutions e-money distributor must disclose: –technical requirements to use the system –obligations –liabilities –dates of credits and debits –account charges, –methods of dispute resolution

21. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS EU Electronic Money Directive (cont.) Issuer must provide: –transactional information, electronically if appropriate –method to view 5 previous transactions User must: –keep password safe –notify issuer of any loss or theft User has no right to reverse order Issuer is liable for defective transfers

22. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Major Ideas States cannot create money; the Federal government and private companies can Regulation E covers consumer electronic money transfers Regulation Z covers consumer credit cards UCC Article 4 covers commercial money transfers

23. 46-840 ECOMMERCE LAW AND REGULATION SPRING 2003 © 2003 MICHAEL I. SHAMOS Q A &