Electronic transactions are becoming more and more common, in the Internet age. Most people in developed countries now do some or all their banking online. Have you ever used PayPal to send or receive money? Then you’ve experienced electronic money. But what is it, and how does it work? Here are 6 things you should know about electronic money.
A License Is Required to Work with Electronic Money
In many places, when you use electronic money or deal in it, a license from the financial regulator is required. Whether it’s a UK EMI license or another type of regulatory license, this is so that the money being transferred isn’t used for illegal activities such as fraud and tax evasion. In addition to banks and credit card companies, other businesses including online marketplaces may also need licenses in some cases.
To illustrate, Vendors on eBay or Amazon Marketplace have to follow rules about how they handle payments made using PayPal’s services – these include not charging buyers’ credit cards unless items have been shipped to them. Failure to follow these guidelines could result in their accounts being suspended by eBay/Amazon and/or a fine or other punishment enforced by law enforcement agencies.
Electronic Money Defined
Electronic money is simply money that’s stored and moved electronically. You can think of it as a more modern version of paper banknotes and coins, only with less tangible benefits like the ability to be transferred over great distances almost instantly (and minus the hassle of carrying around heavy coins and notes).
Electronic Money Doesn’t Necessarily Have a Central Authority
The electronic money being transferred doesn’t have to be managed by one single entity. In fact, some forms of electronic money are created and managed collectively by their users. Cryptocurrencies such as Bitcoin operate on this basis – there is no central authority, rather a sophisticated peer-to-peer network that keeps track of all transactions. The use of cryptography ensures that all participants in this system can work with confidence, knowing that they’re dealing with each other and not fake or fraudulent accounts (which would be very hard to create).
Bitcoin has become popular over the years due to its popularity and the perception among many businesses and consumers that it’s safer than paper currency. This partly stems from what has already been mentioned about it being difficult to counterfeit, but there are other reasons too. Because bitcoins are limited in number, they can’t be simply printed or minted by a central authority, which can lead countries towards bankruptcy (as is the case when uncontrolled money printing dilutes the value of existing notes/coins).
Electronic Money Has Real-World Value
Although it may not be possible to hold and touch some types of electronic money in the same way you can hold paper currency, doesn’t mean that it’s somehow fake. Electronic money is very much real-world currency: it’s just a matter of where its value is stored. Coin or banknote currency is simply a form of representation of real money – typically this means an accounting ledger entry somewhere along with notes/coins used as actual currency.
The same goes for most types of electronic money, such as transactions processed by PayPal on your behalf when selling goods online: although the funds appear in your PayPal account balance rather than the seller’s (and represent more theoretical dollars that don’t physically exist), they definitely do have value and can be used to pay for goods and services just as if they were paper money.
Electronic Money Can Be Stolen/Hacked
Electronic forms of currency work just like their physical counterparts – anyone who has access to your account or personal details could potentially steal your electronic money (or even the money held by a business you’ve given access to). This includes all sorts of people, from hackers, trying to break through a website’s security systems to the young woman working at a courier company where you send a package with an electronic payment included in it.
In both cases, once the electronic money is stolen, it would be very hard (if not impossible) to get it back to its rightful owner – that’s why electronic money needs to be protected just as if it was cash. Although some types of electronic money like Bitcoin are more secure than others (i.e. Bitcoin isn’t completely anonymous, but it is relatively easy to make Bitcoin payments without revealing your identity) all electronic currencies can be vulnerable to attack.
Electronic Money Can Be Exchanged Easily
Because of the nature of digital information, all forms of existing electronic money can be exchanged with ease – there’s no need for any magical devices or complicated technology beyond a computer and an internet connection.
With this said, it’s hard to transfer physical cash simply by typing numbers into a website – physical electronic forms of currency require a more personal approach.
Electronic forms of currency may seem relatively new and complicated compared to traditional paper money, however, they’ve actually been around for decades. As long as there’s a trust-based system in place (such as the one that underpins Bitcoin) electronic currencies can be used safely for online transactions.
