The Main Risk to Customers’ Funds

• Bankruptcy or insolvency (loss of agent or customers’ funds), which can arise when the Provider is insolvent or otherwise fails, and customers’ funds are used to repay the Provider’s debts;
• Illiquidity (unavailability of agent or customers’ funds), which can arise when the Provider uses customers’ funds for its own purposes and then does not have enough funds left in its account to provide to customers when they request it;
• Operational risk, which is loss of customers’ funds due to the Provider, or an employee of the Provider’s fraud, theft, misuse, negligence, or poor administration.

• Protection 1: Fund isolation, which primarily involves ensuring the customer, not the Provider, holds the ultimate interest in the funds, and can be achieved by requiring the Provider to store customers’ funds in a ‘trust’;
• Protection 2: Fund safeguarding, which involves liquidity, restriction on use, and diversification rules that aim to ensure the Provider always has a 1:1 ratio between issued e-money and customers’ funds;
• Protection 3: Reducing operational risk, particularly in relation to theft of customer’s funds, by requiring the Provider to regularly audit the trust funds, which are checked by the regulator.