E-Currencies and the Future of Money

Part 1 of this series discussed e-currencies, but did not go into depth in actually defining what it is. In this, the second installment, I will try to lay the groundwork for understanding e-currency, and I will try to do so without confusing the reader (and myself).

We must start with the question: Why were e-currencies created in the first place? Aside from what the government might have you believe, e-currencies were not created solely for use by gamblers, scam artists, pedophiles, drug dealers, and money launderers. Rather, e-currencies were created to latierrademisamores overcome the limitations of other forms of money. While every merchant on the internet would be thrilled to accept payment in cash, it’s just not feasible to expect people to overnight a wad of Franklins for their latest purchase. Electronic payment systems,such as those supported and often demanded by certain large auction sites were designed to make existing money easier to exchange electronically. These too, however, have limitations, which will be discussed later.

One of the big benefits of the internet for merchants is the ability to conduct business internationally without the hassle and cost of establishing a physical presence in each country. Yet the vast majority of consumer e-commerce is conducted with the use of credit cards which have numerous limitations.

First, most of the consumers on the internet today don’t have a credit card. If you think that the consumers with money to spend all have credit cards, you are sorely mistaken. For example, most citizens of the Peoples Republic of China do not have credit cards, yet their spending power is growing by leaps and bounds. Companies are excited to establish businesses in China, yet they can’t even sell products to consumers in China.

The second major drawback of credit cards is the chargeback and it’s evil twin, the delay in getting funds into an account where the money can be used. When a sale is made, you don’t really know if you’ll ever see the money or when you might be able to use it.

And finally, I don’t know of any merchant who loves paying 2-12% in fees on each transaction in order to fund credit card company profits and consumer fraud. With the recent widespread adoption of debit cards, credit card companies have finally clawed their way into the revenue streams they couldn’t get part of in the past — the personal check and cash.

In order to understand the value of e-currency, it’s important to consider all of the above. After all, the value of a currency is directly related to one’s ability to use said currency to purchase goods and services (or to pay taxes and avoid jail). The ability to use a currency is controlled by two factors: government acceptance (to pay taxes) and/or fiat (“legal tender for all debts public and private”), and merchant acceptance of the currency to purchase goods and services. For thousands of years, the currency preferred for paying taxes was not necessarily the same as the currency preferred by merchants. Regardless of how the government might want its taxes paid, merchants would often demand precious commodities such as gold in payment, out of distrust of the government, or because gold was more widely accepted in trade. Even today, as many travelers know, merchants in many locales worldwide not only accept the US Dollar, they may even prefer it. (This may change in time however … I recently read of a Euro-only shop in NYC.)

There is an academic debate about whether gold is truly a currency or just a valued commodity, but that is beyond my scope and expertise. However I think I can say without being controversial that gold is a good and common backing asset for money issuance. In addition, there is a fine line between what constitutes a currency and what is merely a “payment system.” It’s a question of whether “it” is is a medium of value exchange (money) or a method of exchange of value (payment). Finally, there is a big difference between a currency and a currency storage vehicle, such as a bank account. Which begs the questions: is e-currency really currency, or is it a payment system? When I put US$ into an e-currency account in order to exchange value with a merchant (i.e. pay for something), did I just buy a new currency, or did I only create a storage vehicle for my US dollars? Is e-currency a desert topping or a floor-wax? (Mandatory answer to this question is always “both.”)

The answer is not as simple as it might seem. It depends, and the reasons are not obvious. Stay tuned!

Stephen Madigan is an emerging expert in e-currencies and their role in the global economy. His new scam-busting blog ([http://www.scambuster.info]) attempts to make clear what is scam and what is real in the current hype cycle, online and offline.



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