No Need Yet to Regulate Electronic Cash, Fed's Vice Chairman Tells

WASHINGTON - Federal Reserve Vice Chairman Alan S. Blinder said Wednesday that government should not yet impose regulations on smart cards and other emerging forms of electronic money.

Testifying before a House Banking subcommittee, Mr. Blinder acknowledged that stored-value cards, serving as electronic equivalents of cash, could hamper the central bank's ability to manage the money supply.

But agreeing with MasterCard, Visa, and others in the electronic payments business, Mr. Blinder concluded it is too soon to regulate.

"The Federal Reserve has not the slightest desire to inhibit the evolution of this emerging industry by regulation, nor to constrain its growth," Mr. Blinder said at one of the monetary policy subcommittee's series of "future money" hearings.

At the first session in July, several financial industry panelists and developers of smart card and on-line electronic cash systems urged Congress not to rein them in with premature laws and regulations.

Members of Congress and economists have raised questions about monetary- control implications. Mr. Blinder pointed out that if electronic cash became widespread, it could reduce the Federal Reserve's earnings. Last year the central bank made a $20 billion contribution to the U.S. Treasury.

As he said at the first hearing, Rep. Michael N. Castle, R-Del., chairman of the monetary policy subcommittee, emphasized the need for education about technology and its effects. He said legislation is not being considered to regulate electronic cash.

Mr. Blinder conceded that the absence of specific laws creates risks for users of stored value cards in place of cash. For example, he said, an issuer that invests and loses customers' unspent funds might not be able to cover balances remaining in a card.

He also warned that settlement procedures and anti-counterfeit measures would not be sufficient if electronic cash were to become prevalent.

He said the potential risks are serious enough that Congress should not exempt stored value cards from the debit-card rules in the Electronic Funds Transfer Act, as pending legislation would do.

Instead, Mr. Blinder suggested that Congress wait until the Fed gathers public comment on proposals applying parts of the Electronic Funds Transfer Act to stored value cards.

Joining Mr. Blinder at the hearing, and addressing similar concerns, were Comptroller of the Currency Eugene A. Ludwig, Stanley E. Morris, director of the Treasury's Financial Crimes Enforcement Network, and Sally Katzen, administrator of the Office of Management and Budget's information and regulatory affairs office.

Saying the government could wield the power of a big user of the technology as well as regulator, Mr. Ludwig said, "We must be careful not to act precipitously or allow market participants to use government regulation as a means of gaining inappropriate advantage over their competitors."

In the near term, he said, Congress and regulators should be considering basic rules such as liability for lost cards, resolution of intercepted transactions, and treatment of unclaimed funds.

Mr. Ludwig warned that extensive use of electronic payments, and hence potentially large-scale cash movements both in and outside the banking system, could increase the risk of fraud, financial shocks, and failures. He also raised consumer privacy issues, saying individuals' deposit accounts and access to private information have to be safeguarded.

If government officials can anticipate the risks and other potential problems, then appropriate regulation might increase consumer acceptance and help electronic cash grow.

"There will be a significant transition period before electronic money gains broad acceptance," Mr. Ludwig said. "The private sector and government must use this transition period to address the concerns that will inevitably arise."

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