Electronic Money: Challenges and Solutions

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electronic money

Electronic money, also known as digital money or digital currency, rose to popularity in 2013 after Bitcoin’s shooting in value by over 1000%. Many people as well as businesses started considering it as an alternative to the usual currencies that are issued by governments across the world. In addition, tourists have been using electronic money since its value will be stable at any given time. There was an increase in preference for currency in the underground economy with most of the criminals starting to use it. As the bitcoin increased in value, its use started to grow worldwide. However, with the recent crashes in price of bitcoin and other cryptocurrencies, there has been a debate on how far the alternative currency can serve to replace the existing forms of currencies. Due to its nature, bitcoin is not regulated but operates on a decentralized network. The opponents of the common banking system have been revealed to develop a particular liking for bitcoins.

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Over the last decade, digital currencies such as bitcoins and blockchain technology have become a major competitor to fiat money. Accordingly, central banks have considered restructuring of their financial system and monetary policies to allow them to launch their versions of digital currencies (Pfister, 2017). Presently, only about 8 percent of global financial transactions involve cash. However, with the continued influence of digital currencies, it is likely that the figure would diminish, possibly disrupting central banks’ legal ability to control money (“Why Central Banks Could Mint Their Own Digital Currency”, 2018). In addition to their utility as a store of value and a medium of exchange, cryptocurrencies can differentiate the function of money. For instance, they can act as a medium of exchange allowing traditionally centralized currencies to only function as a store of value (Prasad, 2018). If achieved, the Central Bank Digital Currency (CBDC) would have more significance and less volatility compared to the current decentralized forms such as bitcoin.

The impact of economic effects such as financial crises has contributed towards the rapid adoption of the digital currencies. Hence, the digital money is seen as a replacement of the conventional currencies, especially when considering the fact that the latter have some propensity to manipulation by the regulatory authorities. The fact that the coins can be used to transact has been a major motivator towards their adoption. The only difference is that the currencies are unstable since they are controlled purely by demand and supply rather than by some caps put in place by the regulatory authorities.

The benefits involved with digital currencies may be appealing regarding flexibility and lower costs of transactions. However, some of the risks associated with electronic money are far-reaching. These threats have surrounded particular aspects of digital currencies such as volatility, identification of payment beneficiary, and security. The issue of privacy and lack of control the intermediaries is the key to the accepted use as manifested in the legal activities. However, the currencies have the propensity of fraud. Being able to deal with the issue of privacy will determine the overall effectiveness of the currencies. If the electronic money is to appeal to the rest of the users in the world, it has to deal with some of the issues with the main one being the volatility. However, some of the aspects that cause wariness towards the currency are also the ones that appeal to the users. Hence, the digital money propensity of impacting the conventional currencies is largely limited.

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Electronic Money Effect on Monetary Policy, Theory, and Strategies

According to the economic theory, digital currencies can be considered as money if they can store value, mediate exchange, and quantify account. In practice, when central banks legally mint, produce, and circulate fiat currency, they apply various theoretical models to determine the value and use of money in an economy (Durgun & Timur, 2015). Therefore, they become the custodian of money and can regulate aspects such as inflation, stability, and volatility. However, with cryptocurrencies such as the bitcoin, which are produced by private entities and traded online without regulation of third parties, their intrinsic limited supply and volatility in response changing demand and supply require different monetary policies (Bordo & Levin, 2017). Nonetheless, for the BoE, the introduction of cryptocurrencies has not changed its financial policies. By the start of 2018, the Bank of England’s Financial Policy Committee evaluated bitcoins and other digital currencies and concluded that currently, only the underlying BT was essential in the planned launch of CBDC. Thus, since the UK’s financial system remains resilience to the influence of digital currencies, no policy measures have been implemented to address crypto-assets (“Financial Policy Committee statement from its meeting – 12 March 2018”, 2018).

The Roles of Large Financial Institutions in the Digital Currency World

Noteworthy, large financial institutions’ first responsibility is to safeguard the real value of economies. Accordingly, in the world of cryptocurrencies, they police the digital frontier, settle trades, ensure interactions between the small financial institutions and the customers, and provide real liquidity where cash-at-hand or reserves are needed. In addition, they monitor online transactions to ensure that the privacy guaranteed in the BT use does not increase funding for illegal activities such as terrorism (D’Alfonso, Langer, & Vandelis, 2016).

Digital currencies will mainly affect the interbank transactions in performance and process flow of settlement according to the number of nodes that central banks and other large financial institutions will use for the settlements. For example, lower performance of tractions between banks will likely be experienced if one or more of the trading institutions have multiple nodes. Technically, the latency duration increases between the time one bank makes a request, deposit, or payment and the time another updates its ledger to reflect the transaction. Thus, any increment in delays of updating the digital ledger will translate to higher payment traffic, especially if the same blockchain nodes are used for other commercial transactions (Kawada, Kobayashi, Watanabe, & Kobayakawa, 2016).

Economic Implications

The economic implication of official implementation of a digital currency depends on the perception and ability of the central banks to maintain control of the crypto-assets. For example, Cleland (2017) maintains that if the BoE implements it, it would have to renew existing financial settlement systems to allow more flexibly in response to the rapid changes in payment. The latter would occur due to the blockchain technology. If successful, the bank would be able to operate with more resilience and have direct access to customers. The reason is that the user-centric model of cryptocurrency would allow it to operate for extended hours with minimal employee involvement. Ultimately, the economy could grow progressively due to the increased operational ease and reduced cost of payment for electronic traders nationwide. However, the potential for growth is contingent on the ability of central banks in most developed countries to maintain monetary and financial stability.

According to Fern?ndez-Villaverde and Sanches (2018), the global economies will respond in a similar manner to the local ones. For instance, in a perfectly competitive market, the available technologies that each country adopts to facilitate digital transactions will determine if monetary equilibrium is maintained (equilibrium will most likely be associated with advance BT systems). Moreover, since the role of private issuers will reduce significantly, the volatility and price inflation central banks could affordably managed cryptocurrencies. However, success is only possible if central banks enforce certain immutable principles and protocols such as the three cores proposed for the BoE. They will help ensure that the supply of cryptocurrencies is consistent price stability factors in competitive markets, a function that will ultimately increase their usage and possibly cause economic growth. In contrast, if cryptocurrencies are adopted without complete government oversight of transactions, the technology could promote various activities such as terrorism potentially obstructing CBDC implementation. Thus, for effective global control, the balance between the privacy in transaction and the potential of misuse should be analytically evaluated by central banks as advocates of economic wellbeing. The objective is to implement digital currencies that will embody similar values as the current fiat money on a global scale.

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Notably, most central banks in the world have evaluated the potential benefit of launching own DC. However, none has successfully launched their version due to the limited circulation of the crypto-assets and the associated slow adoption for public mass. Regardless, beginning 2014, the intention of banks crediting government controlled DCs grew stronger, with some such as the BoE forming committees to evaluate the potential benefits and drawbacks of the project. At the moment, although the currencies have shown the capacity to perform similar functions of storage value, exchange unit, and exchange medium that fiat money plays, the current design of the economics of scheme has been a significant challenge to the adoption of cryptocurrencies (Ali, Barrdear, Clews, & Southgate, 2014a). However, it is expected sooner, possibly in a decade, that major central banks across the world, including the BoE, will implement government-controlled cryptocurrencies successfully.

In practice, the implementation of DC as the official state money will probably be based on the distributed ledger technology underlying the crypto-assets. According to the majority of reports from central banks, the technology will allow them to integrate DCs into existing electronic financial assets and transfer systems with ease. For instance, most financial assets such as bonds and shares in commercial and central banks only exist as digital records. Thus, they could easily be transferred if DCs were made official (Ali, Barrdear, Clews, & Southgate, 2014b). Thus, the existing infrastructure is suitable and ready for the implementation.

Moreover, Kumhof and Noone (2018) state that the benefits of adopting DCs as official money will probably speed the implementation of the purpose. For instance, CBDC would easily be accessed more broadly by the public and commercial banks compared to the current reserves. It would also have potentially greater use and functionality mainly in retail transactions compared to the fiat cash that central and commercial banks distribute. In addition, the distributed ledge technology that would underlie the central bank DT would make it as an official monetary system have a separate operational structure than fiat money (Meaning, Dyson, Barker, & Clayton, 2018). Essentially, digital money would have a potentially different and distinct core purpose allowing fiat currency to remain relevant and to continue playing its three-pronged function in the society. For instance, if DCs were to be adopted as the social money, the reserves and the CBDC would not be inconvertible to each other. Principally, it would allow commercial banks to trade with central banks with both reserves and DCs without risking financial instability (Kumhof & Noone, 2018). It means that the immutable principles will stop depositors from switching one mode with another abruptly in response to market changes. Finally, implementing digital currencies as the official monetary system would allow the government and traders to gain interest through traction assuming that a realistic payment rate would be adopted that would be different for that of reserves. Therefore, from the ability of central banks to use existing infrastructure and system to the potential benefits that traders and depositors would reap, it is likely that DCs, possibly CBDC, would be implemented as the official money of the state in the next decade.

Critical Analysis Based on Current Events

So far, most central banks, including the BoE, have issued working papers citing some of the areas of focus in the bid to implement DC. For example, for the BoE, a recent release indicates that the institution has already determined the most basic and core financial principles that would allow it to launch its version of cryptocurrencies. In particular, the first protocol laid out by the institution is the need for the CBDC to have an adjustable interest rate. It would allow the establishment to regulate and maintain financial and price stability. In addition, it would help in sustenance of parity between the bank deposits and the CBDC. Practically, assuming that the cryptocurrency adopted by the BoE were to pay a fixed nominal interest that is similar to cash (zero), an oversupply of the digital money with central bank and market would create an imbalance between demand and supply (Kumhof & Noone, 2018). Thus, an adjustable interest rate is one of the main methods that the central back can use to ensure that the cryptocurrencies remain in supply without destabilizing the economy (Prasad, 2018).

Second, the BoE has also noted the need to have both cryptocurrencies controlled by the government and reserves remaining distinct and inconvertible into each other. The goal is to ensure that the popularity of one medium does not lure people to hoard it creating a shortage of supply and evenly leading to price vitality. Finally, given the tendency for people to react to market changes abruptly during traducing with cryptocurrency, the bank has also opted the necessity of offering no guarantee to on-demand conversion of depositors’ assets into CBDC (Meaning et al., 2018). It is a necessary step to ensure stability in the long term.

Besides, some monetary institutions such as China’s central bank have already begun testing their version of government-regulated cryptocurrency. For instance, Knight (2017) notes that the People’s Bank of China has launched its prototype DC and is presently conducting transaction with various national commercial banks. Bitcoin is the leading decentralized cryptocurrency in the market nowadays. Being one of the biggest users of bitcoin, the step to launch and test its CBDC is a major indicator that other financial regulatory institutions, including the BoE, will soon follow the trend (Manta & Pop, 2017). Therefore, financial institutions are willing to regulate it.

From the analysis, it seems that digital money will soon be made national monetary system due to the convergent of political, economic, social, and technical issues in support of the medium. For example, publically, the BT ensures transparency of trades, which fosters trust (Woodside, Augustine Jr., & Giberson, 2017). Economically, the low cost of transitions and automation will increase the timely completion of transactions, especially if third parties are barred. Socially, even if the government controls the currency, the user can monitor it from a remote location. Technically, the current infrastructure and technology allows for a public rollout of the program nationally (Kawada et al., 2016). Although, certain drawbacks related to its stability slow down the full implementation of the technology.


Electronic money and distributed ledger technology have increasingly attracted the interest of central banks such as the BoE due to their potential for economic growth. In particular, given the ability of the technology to ensure fast, cheap, and private transactions, they could revolutionize the banking industry. However, for governments to introduce their version of CBDC they need to ensure certain core and immutable principles are in place. The goal is to promote financial stability, reduce price and monetary volatility, and grow the economy through online digital currencies. For the BoE, the potential of rolling out state-regulated digital currency could happen in the ten years if current research and development into the technology continues.

The future of the digital money is dependent on the level of support that it receives from the governments. However, even with the popularity among the customers, there is some level of restraint. The currency can only be used in storage of value if it is scared. With the existent mining of the currency across the world and among other cryptocurrencies, the end result would be dependent on how much the currency is rare. The fluctuation in value is also low. The electronic money is not backed by some value as currency is; hence, it can be manipulated easily. Despite the high level of popularity that it has received, the currency would be most likely to remain as a fad as it crashes in the recent times. Therefore, digital currencies may persist into the future with the high level of fluctuations and associated panic selling.

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