Smart Banking Guide

I am used to Electronic money, Digital money. I mean my internet banking, bank cards. I keep some pennies in my pocket only for tips, rail and bus. I remembered one time I was in traveling, I can’t pay my tips at the airport, I felt so embarrassed.

There are several forms of dematerialized currencies appeared in the 80s bolstered by the increased use of prepaid cards, such as telephone cards. Three types of emerging monies, all of which are dematerialized, will be discussed: electronic money, virtual money, and digital money.

Electronic Money

Electronic money can be a monetary value measured in fiduciary units that is stored in an electronic device owned or available to the consumer. It is thus a movable scriptural means of payment that carries the values in units of payment in an electronic store. This corresponds to a binary form of scriptural money, stored on portable support such as a smart card. The scriptural character of the electronic money is related to the status of the issuer (since it is not issued by the central bank) and to the traceability of the transactions and the movement of money.

The units of payment contained in the cards or in the software are bought either with fiduciary money or by charging to a bank account. The discharging power of these units is restricted to those merchants who accept them. This is the reason certain experts consider that electronic money does not exist in a strict sense, because it is neither legal tender nor does it have discharging power.

Virtual Money

Virtual money differs from electronic money in that its support, its representation, and its mode of payment do not take tangible forms. Virtual money can be contained in software programs that allow payments to be carried out on open networks, such as the Internet.

Starting with the BIS definition for electronic money, one can consider virtual money as a referent (or a pointer) to a bank account. The scriptural character of virtual money is also tied to the status of the issuer (it is not issued by the central bank) and to the traceability of the transactions.

In the limiting case, virtual money may also be a virtual token (or jeton) issued by a trusted issuer for a unique usage in a closed circuit. These jetons are different from the electronic versions of legal tender because they are recognized only in a restricted commercial circuit. This contrasts with electronic money, which is a multipurpose payment mechanism that is recognized in general commercial circuits.

Millicent, for example, is one system that proposes a method for micropayments with a virtual jeton, the “scrip.” A service provider issues a scrip, which does not have any direct relationship with the banking system, but is a promise for future service. By generalizing this notion, service providers can issue their jetons and tie them with bank accounts that they maintain. They will remain within the perimeter defined by the law as long as these units are ascribed to a specific purchase within a well-defined circuit.

Telephone cards are a particular case of virtual purses issued by telephone companies. These cards are prepaid and the values they store are dedicated to the settlement of telephone communications at a given service provider. The purchasingpower is described in terms of “telephone jetons” that correspond to the impulse counts in the telephone networks.

Interbanking networks are strictly regulated and monitored by the monetary authorities in each country, given that only the central banks have the monopoly to print money. The dispensation given to telephone cards was justified on the basis that telephone tokens represent future service consumption, paid with the legal money. Furthermore, it is very difficult for banks to propose an economic alternative to the billing and collection of amounts that are individually marginal.

The example of the telephone card, whether discardable or rechargeable, could encourage telephone companies to aspire to an intermediary role in electronic commerce, especially for micropayments. However, this ambition requires passage from the “virtual purse” mode to the “electronic purse” mode. In other words, the value stored in the telephone card (i.e., the billing impulses) must be recognized as a new scriptural and universal money, expressed in a binary form. This poses the problem of how the financial authorities can regulate this new money supply.

Digital Money

Digital money is an ambitious solution to the problem of online payment that will be further. Like regular money, each piece has a unique serial number. However, the support for this money is virtual, the value being stored in the form of algorithms in the memory of the user’s computer, on a hard disk, or in a smart card.

As will be shown later, one of the most salient characteristics of the digital money of DigiCash is that it is minted by the client but sealed by the bank. The creditor that receives the digital money in exchange for a product or a service verifies the authenticity using the public key of the issuer bank. Anonymity is thus guaranteed, but it is difficult to transfer the value between two individuals without the intervention of the bank of the issuer. Furthermore, as each algorithmic step is associated with a fixed value, the problem of change causes some complications.

As a new step in the dematerialization of money, the digital unit of money will be a monetary sign, with a real discharging power that the economic agents in as large an area as possible could accept in return for payments. The exchange of value takes place in real time via the network using coded digital coins, but the clearance and settlement may be either in real time or in non-real time. The digital money can be exchanged with physical money at banking institutions after verification with an authentication database. This database can be centralized or distributed.

One of the characteristics that distinguishes digital money from other electronic payment systems is the ability to make the transactions completely anonymous, i.e., to dissociate the instrument of payment from the identity of the holder, just as in the case of fiduciary money. A destabilizing aspect of this digital money is that it could lead to a new universal money independent of the current monetary system. This is the reason attempts at creating digital money have encountered technical and legal difficulties. A digital currency that is indeed international would collide with the various regional and local currencies and would disturb the existing economies. The question is no longer exclusively technological, as it touches upon aspects of national sovereignty and foreigr intervention. The economic and political stakes of such a proposition are enormous and may lurk behind the screen of juridical disputes.