6 Things You Need To Know About Electronic Money

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In the world of finance, things move quickly. New developments and technologies are promptly adapted when they prove useful and tweaked for maximum efficiency. When something works, it is rapidly adopted by other institutions and governments, and this results in an explosion of adaption throughout the world.

While this is usually great news for the industry of finance as a whole, the sheer speed of changes can leave people a little lost or confused from time to time as they try to keep up. The following will explore what you need to know about just one newer concept in the financial industry: electronic money.

What is electronic money?

Before diving into things you need to know about electronic money, it might first prove useful to explore what electric money is. Broadly, electronic money is money within banking computer systems that can be used for electronic transactions.

Things You Need To Know About Electronic Money

Electronic money has become popular because it is extremely convenient. It allows electronic transfers, online payments, and is typically seen as a little safer, particularly when expensive purchases need to be made. Think about carrying all the cash you’d need for the downpayment on a house and how nervous you’d feel making your way to where the exchange was going to take place.

An electronic transfer is much safer because you don’t need to worry about getting mugged and losing all the money. You don’t need to worry about dropping it or losing it in some accident or other. 

Electronic money is also thought of as more transparent because of the digital paper trail associated with it. When you pay in cash, unless the bills or coins are marked, they’re hard to trace. Electronic transactions save digital records down to the cent. The transparency element has led some economists to predict that electronic money could decrease the risk of inflation.

To summarize in more practical terms, when you send an electronic transfer, shop online, receive paycheck money through direct deposit or spend money on either a credit or debit card, you’re using electronic money. Even if you’re someone who prefers working with cash, you likely use electronic money for larger purchases like plane tickets.

It is not the same thing as cryptocurrency

Some people might not immediately see how electronic money is different than cryptocurrency. It is important to note that the value of electronic money is backed by fiat currency. There is tangible, physical money in the world that electronic money represents and can be exchanged for.

It is not the same thing

This makes it different from cryptocurrency, which exists only digitally. There aren’t crypto coins or bills you can carry in your wallet and give to a cashier in exchange for goods.

It’s older than you might think

The seed behind the idea for electric money was planted in 1946 by a man named John. C. Biggins. He presented the concept of a card that clients of his bank could use to pay local stores. 

The bank would then ensure that the stores were paid and that clients paid the bank what was owed. This seed continued to grow until the 90s, when money exchanges began to take place between computers.

How electronic money works

Electronic money is used all over the world. While it can be exchanged for fiat currency, it is often used through electronic baking systems and so monitored via electronic processing systems. 

The result of this is that, in most cases, only a fraction of a given currency is being used in physical form (as bills or coins). The majority of a given currency is used electronically. This involves cash being held by banks in vaults as well as backing from central banks.

This is another way in which electronic money is different than cryptocurrency. Crypto does not rely upon the existence of a central bank; it doesn’t need a government at all to function. Because of this connection to central banks, electronic money is also tied to the economic power (both perceived and real) of a government.

To facilitate the ever-expanding role electronic money plays in society, many governments and marketplaces have had to establish infrastructure for electronic money transactions. Payment processing networks like Visa and Mastercard are a big part of this. Prepaid cards and digital wallet systems like Square and PayPal are also a part of this. As people’s use of electronic money expands, so will the systems designed to facilitate the movement and exchange of electronic money.

Electric money is not without risks

Like anything that has to do with finance, electric money can draw criminals. If something is valuable, people want to get their hands on it, and some people want to take illegal shortcuts to do so. 

How electronic money works

Fraud can be an issue when money does not need physical verification of the original owner’s identity during a transaction. Moreover, electronic money exchanges can be more discreet, making it easier for people to evade taxes.

To combat this, the computer systems that carry out these transactions are constantly being monitored and updated. Further, many governments keep a firm grip on which institutions are allowed to serve as electronic money institutions. 

For instance, if you look into the process for gaining an EMI license in Lithuania, you’ll see that the process is incredibly strict. Currently, Lithuania has 77 institutions with licensing; this places them as the country with the second-highest amount of EMI licenced institutions. The UK is first.

Electronic money is not without government intervention

When people begin researching the differences in currency options around the world, some of them are looking for ways to set their money up separately from their government. This might be because they ethically disagree with their government or because they don’t trust the state to properly manage their financial wellbeing.

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 As stated above, electronic money is just like standard currencies when it comes to government intervention—it’s backed by the central banking system.

This means that if the government makes a decision that affects inflation or has potential financial hazards you’d like to avoid, electronic money will not be able to avoid all of these repercussions. Again, electronic money is part of the state monetary system.

On the positive side, this also means that electronic money is supported by the government. The value is held relatively steady because the government in question claims the money has value and because lenders and investors around the world believe a country will repay its debts.

You can look at how rapidly the value of cryptocurrency changes to get an idea of what money moves like without a government system to anchor it in place.

Once upon a time, all the money in use was backed by valuable metals like gold and silver. Slowly, governments began to move away from the gold standard. Many larger nations, led by the UK, began this process in World War 1 because they needed more flexibility with their currency and the ability to stimulate struggling, war-damaged economies.

Initially, this dropping of the gold standard was meant to be temporary, but slowly it became the norm. Switzerland dropped the gold standard in 2000, marking the end of gold standard economies. 

This being said, many country’s currencies still have ties to resources. The Australian dollar is linked to iron prices given how much iron they export; oil-rich counties like Canada and Russia have currencies that are linked to oil prices.

It is also worth noting that back in 1944 before most countries had switched away from the gold standard, an agreement was made to set the exchange rate for currencies and gold. At this time, the United States of America had a considerable amount of gold. The result of this was that many currencies were priced against the US dollar. Many currencies to this day are tied to the value of the US dollar.

Because of this, the value of electronic money can be influenced by the value of the US dollar in many cases. It can also be influenced by the price of oil and other valuable resources.

To summarize

Electronic money is money that is used digitally or electronically and is tied to fiat currencies. Because of this, it’s different than cryptocurrency, which is electronic money not tied to fiat currency. While the current iteration of electronic money feels very modern, precursors of this concept were developed in the 40s.

Electronic money works by using licensed electronic banking systems around the world that are backed by central banks. These systems have their own benefits and risks and are under the influence of government fiscal policies.

In conclusion: 6 things you need to know about electronic money

Of course, the world of money and value is highly complex, with extremely educated and intelligent people at the highest level of economics in disagreement about what is right and what is wrong, about what is effective and ineffective. This makes it hard to make definitive statements about it.

The economy is influenced by the physical world (stores, goods, services and resources like oil and gold), the mental world (governments, laws, institutions, systems), the digital world (computer systems, online stores, technology), and the emotional world (what people believe about money, the perceived value of a currency). This adds another layer of complexity.

It’s important to note that most large financial decisions like dropping the gold standard or embracing crypto are not unanimous decisions. In many industries, the collective experts come to some sort of conclusion that most people operate within. When it comes to finances and economics, this isn’t the case. In many ways, we’re all part of an economic experiment; the long-term outcome remains to be seen.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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