E-Money

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The e-money - electronic money - is a value or means of payment that is stored on an electronic device. Thus, through this system it's possible to carry out transactions without necessarily involving a bank or other financial entity.

Electronic money, in its broadest concept, includes any payment system that involves a digital medium. In this way, it includes prepaid cards, credit cards or electronic wallets, among others. All these means use software, in some cases hardware, and an internet connection to carry out transactions. Almost all of them are widely used and known to most of the people.

A more restricted concept of electronic money refers to money expressed in bits (minimum unit of information in computing). Thus, it's a means of payment that doesn't have a physical unit and its transactions are carried out through the exchange of bits without using bills, coins or any other conventional means. This type of money has also been known as "E-money", "digital-cash" or "cyber-currency".

How electronic money works

Electronic money, in its broadest and most well-known sense, works as a virtual means of payment, but it's expressed and supported in common monetary units (euros, dollars, etc.). In addition, they can be transformed into money.

For example, if we have a prepaid card of 1,000 euros, we know that we have previously deposited that amount and we can use it in transactions until we cover that amount. Likewise, if they give us a card with a capacity of 3,000 euros, we will then have to pay that amount, plus the interest that they charge us, all expressed in euros.

In the case of strict electronic money, its value is expressed and stored in bits. When an issuer delivers virtual money to a person, it will deliver an electronic file with a set of encrypted bits. These bits are nothing more than electronic information that is stored on a microchip that can be attached to a digital card.

With (strict) electronic money, transactions can be made through the internet, mobile phone or interactive television instantly and confidentially. The transaction is from one chip to another and doesn't require the intermediation of a bank or to have a bank account.

The value of electronic money issued by an agent will depend on the credibility and acceptance it finds among its virtual users. Some issuers have decided to back their electronic money in gold (such as e-gold) as a way to give more confidence to their users.

Advantages of electronic money

Electronic money has important advantages over fiat money:

- Avoid the cost and risk associated with transporting and / or storing large amounts of money.
- The chip can be programmed with electronic money so that it can only be used for a particular destination, thus eliminating the risk of diversions, theft or loss. Thus, for example, it's possible to program that electronic money can only be spent in a certain store. In this way, if we send a person to buy materials, they will not be able to spend part of the money on other uses.
- In some cases, it's possible to make transactions in complete confidentiality and anonymity.
- It gives agents greater freedom to make exchanges.

Disadvantages of electronic money

There are also significant downsides and risks to using electronic money. We describe some of them below:

- It's more difficult for central banks to calculate the money supply and therefore to carry out monetary policy.
- Given the lack of control, electronic money transactions can evade taxes with the consequent drop in state revenues.
- Transactions in a digital environment make it difficult to determine which is the competent authority for the control and sanction of illegal activities.
- New forms of electronic crime will appear that can be more complex.
- Money laundering, fraud, and illegal financing activities are more likely to go unnoticed.
- Computer failures or attacks can have serious consequences.

Future of electronic money

Currently, the use of (strict) electronic money is limited, but it's expected to grow over time. In order to take advantage of its advantages, we must already design mechanisms that reduce its risks and damages.

Just as in the past we considered it unthinkable that money didn't have a gold backing, today we must adapt to the idea that it's possible that money permanently leaves its physical form to become a digital payment method.

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