The Rise of Electronic Currencies

Updated: Jun 17

By Fulldive on 28 October, 2019


The institution of money is swiftly evolving due to advances in computer-based cryptography. Technological innovation has prepared the ground for electronic cash-like instruments that no longer require expensive financial intermediaries we use presently to settle payments. Due to technical advances, it is possible to create cost-effective electronic alternatives to coins and banknotes, which are the conventional physical currencies. The newer currencies that are variously called crypto, digital, and electronic currencies have already been supplied by private issuers.


These electronic alternatives are as convenient as debit cards, potentially safer than deposits and cheaper to use while being as peer-to-peer as the traditional cash. Consequently, there is significant interest from both public and private financial institutions to understand whether or not there is an opportunity for currency innovation. The most common digital currency is denominated in a sovereign unit, issued by central bank or private institutions called electronic money or e-money, a digital counterpart of physical cash. The ledger associated with the e-money is centralized and more expensive. There has been innovation to make this system decentralized and hence, lowering the settlement cost. A database-sharing innovation — blockchain technology, which allows database to be easily shared publicly.


In the past ten years, creation of new digital currency emerged that are not issued by sovereign institution, are not denominated in a sovereign unit, and do not have physical counterparts like e-money. This new digital currency is cryptocurrency. Bitcoin, the first cryptocurrency built around the blockchain-based distributed ledger framework. Although bitcoin has not been adopted widespread and not everyone agrees this to be a currency due to its volatile and unstable store of value, the use of bitcoin is increasing by year just like e-money.


In the presence, electronic currency and cash co-exist and are used together in different situations. Both currencies have their own advantages and disadvantages while being said that it’s still impossible to cast out cash completely. However, this digital system is evidently accelerated in the current situation where people are more reluctant to use cash nowadays for virus transmission concerns. With the use of e-money and cryptocurrency, people are transitioning to cashless society. Electronic currency has been gradually replacing physical currency and it's an ongoing process. Technological innovation has opened the door to cashless instruments and lower cost in settling payments.


Sources:

Camera, G. (2017). A perspective on electronic alternatives to traditional currencies. Sveriges Riksbank economic review, 1, 126–148.


Dwyer, G. P. (2015). The economics of Bitcoin and similar private digital currencies. Journal of Financial Stability, 17, 81–91.