What is Electronic Money?
Money is constantly evolving. In the advent of the digital age, new forms of money are emerging. Terms like “virtual currency”, “electronic fiat currency" and “central bank digital currency” are now part of regular discourse in current affairs. These words and definitions tend to overlap quite often and the meaning of them is quite difficult to pin down, so what are they?
Basic Definition of Money
Money itself is surprisingly difficult to define. In the simplest way, it is anything which can be used in exchange for goods and services and the settlement of debt. It is easy to mix up the definitions of money with its functions, which are store of value, unit of account, medium of exchange and a means for deferring payment. If something fits the definition and the functions mentioned, then it can be described as money. For the purposes of this article, money and currency are used interchangeably and mean the same.
Electronic Money and Blurred Lines
Electronic money is a form of money which exists in digital form. It can be privately issued or issued by a state agency.
Traditional Fiat Currency
Ironically, all traditional fiat currencies exist as electronic currencies (through deposits) as well as physical cash. Some commentators do not acknowledge that traditional fiat currencies are able to exist in electronic format; the fact is most traditional fiat currencies are traded electronically. One could survive relatively easily without ever needing to use physical cash. Some people may be intrigued to find out the most widely used electronic currency in the world in this regard is the US dollar!
Central Bank Digital Currency
The main difference between central bank digital currency (CBDC) and traditional currency in electronic form is CBDC is exclusively digital, whereas traditional fiat currency can exist in either physical cash or in electronic form. Both would be closely linked since they are issued by a central bank or a government agency. In the advent of a cashless society, a CBDC is likely to be the continuation of a traditional fiat currency, with the subtle difference being it would exist only in electronic format. This can already be seen in Sweden with the Swedish National Bank exploring the concept of an “e-Krona”. Would there be any other significant differences between the Krona and a prototype e-Krona? Other central banks are exploring the idea too, such as the Bank of England.
Central banks have their own slightly differing definitions for virtual currency, but they all touch on the same themes; virtual currency is typically (though not necessarily) decentralised, unregulated and not issued by a government agency. Most virtual currencies exist within a closed system, such as a video game or a company loyalty programme such as air miles. If virtual currency is underwritten by cryptography, then it is described as cryptocurrency. Such examples are Ethereum and Bitcoin. Cryptocurrencies such as these have proven popular due to their independence from government agencies and speculation has grown as to whether they could supplant state-issued currency in the future.
Will these New Types of Currencies Last?
As already mentioned, electronic forms of money are increasingly dominating transactions at the expense of physical cash. Individuals are being encouraged by banks, retailers and other organisations to use electronic forms of payments such as direct debits, contactless cards and other near-field communication devices. The move to an electronic form of money appears inevitable due to ease of use for consumers and the ability to control and audit from a government body.
Virtual currencies and cryptocurrencies seem to be here for the long term as well given the signals coming from central banks and the IMF. The trend seems to be moving towards electronic forms of money and payments, mostly spurred on by younger generations and those living in urban centres.
Their are obvious regulatory hurdles and we can see the difficulty Facebook are currently experiencing with their "Libra" stablecoin. In time these hurdles will be overcome in some shape or form and set precedent for more electronic forms of money to follow. China appear to be taking the lead with apps such as WeChat and WePay, leaving the West playing catch-up.
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