Electronic money, also known as digital money or virtual currency, is a form of money that exists only in electronic form.

Digital ledger technology (DLT), like blockchain, is the origin of electronic money. It allows consumers, investors, businesses and others to transact directly using smart contracts rather than going through banks, brokers and custodians.

With the emergence of electronic currencies, governments and financial firms must prepare for a long-term change in how money works. This means in particular: strengthening privacy laws, reforming the management of central banks and preparing retail banks for a more peripheral role.

Alternatives to bank cards

Electronic money will accelerate the increasing dematerialization of everyday money (contactless payment, payment cards, etc.). A digital currency will notably offer an alternative to bank cards by guaranteeing the impossibility of tracking purchasing habits. Electronic money will above all simplify and facilitate circulation between professionals. Indeed, paying suppliers in paper money is not suitable for professional activity for legal and practical reasons.

Here are some of the characteristics of electronic money:

  • Dematerialized
    • Electronic money does not exist physically in the form of coins or notes.
    • It is only present in electronic form, often stored in electronic accounts or wallets.
  • Online use
    • Electronic money is mainly used to make online transactions.
    • It allows you to make payments on websites, mobile applications or e-commerce platforms.
  • Cryptography
    • Security plays a crucial role in electronic money.
    • Transactions are typically secured using advanced cryptographic techniques, which helps ensure data integrity and protect users from fraud.
  • Decentralized
    • Some forms of electronic money, such as cryptocurrencies, may be decentralized, meaning they are not controlled by a central authority such as a bank or government.
    • Instead, they rely on peer-to-peer networks that allow users to send money directly to each other without going through an intermediary.
  • Traceability
    • Transactions made with electronic money can be traceable.
    • This means it is possible to trace transaction history, which can help increase transparency and prevent illegal activities such as money laundering.
  • Speed ​​of transactions
    • Payments made with electronic money can be processed quickly, within seconds or minutes.
    • This contrasts with traditional payments which can take several business days to clear.
  • Accessibility
    • Electronic money provides greater financial accessibility to those who do not have access to traditional banking services.
    • Users can create accounts and transact from their smartphones, eliminating some of the geographic and economic barriers associated with traditional banking services.

Banks have ambitious plans

All banks have launched ambitious plans to implement ways to use DLT to transform deposits, bonds, stocks and other assets into tokens for trading on their own platforms. Most of the world's central banks are exploring or testing central bank digital currencies, or CBDCs, to maintain fiat currency as the anchor of the global economy.

Example of Central Bank digital currencies or CBDC

CBDCs break down into token-based and account-based approaches:

  • A token-based CBDC works like banknotes today, where information is not known or needed by a cashier when accepting each payment.
  • An account-based system requires authorization to participate in the network, which is similar to paying with a digital wallet or card.

Two motivations are behind the initiatives of governments and central banks

  • The fear of losing control of the “management” of the currency
  • The promise of a better financial system.

The main benefit of CBDCs is the reduction in operating expenses of the global financial sector, which amounts to more than $350 per year for every person on Earth. This could make financing accessible to the 1.7 billion people without bank accounts. Government digital currencies could also expand governments' toolkits by allowing them to make instant payments to citizens and reduce interest rates. For CBDC users, the appeal of a free, secure, instant and universal means of payment is obvious.

CBDCs will have significant impacts on existing monetary policies and fundamentally change the way governments, banks, businesses and people use money.

This system has advantages and disadvantages.

The benefits of CBDC are:

  • Greater technological efficiency enabling real-time money transfers and payments without the need for an intermediary.
  • Broader financial inclusion. Central banks can open low-cost accounts in the name of every legal citizen.
  • A suppression of criminal activities such as money laundering, fraud or tax evasion, and other activities by tracking and observing the flow of money.
  • An elimination of the need to print and manage physical money.
  • Optimization of monetary policy by allowing greater stability and better management of national interest rates.

Example of e-Yuan

Just like cash, each digital yuan is created, signed and issued by the PBOC, China's central bank. Unlike cash, however, the bank retains the ability to track the movement of each digital coin it issues.

The purpose and objectives of the currency are to increase the circulation of the RMB and its international reach – with the eventual hope of the RMB becoming a global currency like the US dollar.

Commercial banks distribute DCEP (electronic payment digital currency) to their customers, who can download the currency from their bank accounts into digital wallets or apps, similar to withdrawing money from an ATM.

The DECP is based on a two-tier monetary system:

  • A CBDC (Central Bank Digital Currency) issued by the Chinese central bank to commercial banks.
  • A CBDC issued by a commercial bank to the general public.

Traceability of anti-fraud measures

The e-Yuan offers a solution to the high costs of issuing, distributing, storing and circulating the traditional Yuan. The latter has all the disadvantages associated with carrying and using cash.

Traceability and the fight against fraud are major concerns for the Chinese government. Virtual currency seems to be the answer to these needs. With the DCEP, the collection of transaction data and information on the circulation of this currency is much easier to achieve. This provides an excellent reference for the development and implementation of future monetary policies. The DCEP also facilitates the fight against money laundering, tax evasion, corruption and the financing of terrorism.

With a digital wallet, consumers can make instant, contactless payments to anyone else who uses the service, whether at the grocery store or paying off a friend. This could theoretically eliminate the need for third-party digital payment services like WeChat or Alipay, which are currently widely used in China.

Note also that Chinese central bankers have committed to protecting user privacy and have stated that the main intention behind the DCEP is to replace part of China's monetary base or scarce cash in circulation. If the project succeeds, a digital yuan could eliminate the need for both physical cash and online payment services like PayPal, and provide another way for China to challenge the United States for global dominance.

Remember that the well – established Chinese habit of paying with a mobile phone should make the transition to a digital yuan an easy sell for consumers while offering big advantages to the communist regime .

Example of the use of electronic money by banks

The use of electronic money by banks will revitalize the key role of banks or fuel the rise of digital-native companies or decentralized currencies where code is king.

Oliver Wyman proposes four paradigms for how money and markets could develop through electronic money:

  • Traditional finance is successfully evolving

Banks and other traditional financial institutions can also develop their own DLT-based solutions to tokenize both money and assets – an evolution of the current system, rather than a revolution.

This scenario envisions governments and central banks adopting new distributed technologies to create digital versions of their fiat currencies that capture a large portion of payment flows. However, CBDCs have not yet reached critical mass in any of these countries. Governments must first decide whether CBDCs would be restricted to use such as interbank payments, or made available to individuals on a large scale, which could pose a threat to the banks that now control access to the most consumers rely on cash and credit.

  • Rise of digital intermediaries

In this paradigm, agile digitally native companies are gaining momentum with platforms that use stablecoins or tokenized deposits to manage everything from lending services to issuing and trading a wide range of securities digital. These companies could grow faster than established institutions and take away their customer relationships. Remember that stablecoins have been used in financial transactions worth $7,000 billion in 2022.

  • Universal open networks

This paradigm would give rise to new open networks that would allow borrowers and lenders, issuers and investors, and other participants to transact directly with each other, without intermediaries. Transactions would be powered by smart contracts and decentralized finance protocols, and algorithms could allocate credit, profoundly changing the business models of banks and digital natives.

In conclusion, electronic money will help build citizen/consumer loyalty, streamline trade, increase recycling and promote local purchases.

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