Introduction
Money has been an important part of different economies for millennia. It took various forms, but in the last few decades, there appeared a new type of this phenomenon – electronic money. It can be of different forms and is often more convenient than paper money. However, there are several hazards and challenges related to the peculiarities of the use of e-money. After defining what electronic money is, we will proceed to discuss those challenges and the possible ways to deal with them.
Definition of Electronic Money
Before starting to speak in detail about electronic money and the challenges it poses, it is important to understand what money is and what electronic money is. First of all, it should be pointed out that money is any type of phenomenon which is conventionally accepted as a universal carrier of value, or “any generally accepted means of payment which is allowed to circulate freely and be used without any reference to the credit standing of the person who uses it” (Good 11). It is interchangeable and does not depend on personal perceptions, opinions, or evaluations of any single given individual.
We wrote that money is “any type of phenomenon” because money can be not only a physical object (stones, coins, paper banknotes) but also e.g., a certain part of computer memory stored on some remote server (a type of electronic money that we are going to discuss). Importantly, there does not have to be any physical substance (such as a precious metal, for example) that secures money; the money’s value comes solely from beliefs of people that the money has value. That belief is usually based on some declarations or documents made by authorities such as the state institutions, and the state usually guarantees its value. But it also should be remembered that, first, any power of the state also comes from a shared belief that the state has that power (e.g., if everyone suddenly and completely disbelieved that Barack Obama is the President of the US, he would lose all his power immediately; no one would just carry out his orders); and, second, it is arguable that if every holder of money suddenly decided to ask the state to exchange the money for some material objects, the state would probably have failed, so the word “guarantee” also has its limitations.
The absence of a need for a particular physical substance allows for the existence of the so-called “electronic money.” Electronic money does not have any particular features or functional differences compared to “ordinary” paper money; the only difference is the form. According to the European Commission, “electronic money is a digital equivalent of cash, stored on an electronic device or remotely at a server” (par. 1). Therefore, there are two main types of electronic money. The first type includes all the money stored on some kind of an electronic token (a card, a mobile phone, etc.), which contains a memory module that has a denomination of value and a serial number and is verified by an institution that has the right to do so. The second type is comprised of the money, which is “stored” on a balanced ledger and can be transferred from one account to another. Ledgers are usually supported, maintained, and managed by an authorized institution, such as a bank. It is also important to point out that token-based electronic money does not require any accounts, whereas, for ledger-based e-money, it is necessary to have a current account (Bećirović 28-29).
Challenges and Solutions Related to Electronic Money
The use of electronic money poses several challenges. Some of these challenges can be solved easily, but many of them may lead to various problems for the parties involved.
The Risk of Loss Information / Erased Memory
The most obvious problem with the use of money stored on electronic tokens such as cards or mobile phones is that there always exists a possibility that the memory of the token will be damaged or erased. In this case, the owner of the token is probably going to lose all their money. There do not appear to exist any completely reliable safeguards against such a situation. Additional memory slots that would duplicate the information from the main memory, transaction tracking devices, and backup systems might be used to (significantly) decrease the chance of the token owner of losing their money. Still, these methods would not eliminate the possibility.
Trust in Electronic Money
We already mentioned that the actual value of the money comes from people’s beliefs in it, and is often “guaranteed” by the state institutions. However, some types of electronic money might be used by some particular issuers only, and not come from the state. It raises the question of trust in electronic money coming from non-governmental institutions. It is noted that at first, there will be a rather low level of trust in such money, and there will be certain market resistance to it, but with time people will become more accustomed to this kind of money and start to use it more often (Cohen par. 15-16). However, this requires numerous conditions, not only the effectiveness of such money but also insurance, high international standards, compatibility, etc.
Acceptance of Electronic Money
For something to serve effectively as money, there must exist a possibility of converting it into goods. However, for this aim, money must be universally accepted by those to whom one wishes to pay (Bećirović 30); the person to whom the payment is transferred has not only to trust this money but also to be able to receive it.
There are numerous advantages to universal acceptance of e-money. Should it be accepted everywhere in the world, it will be a convenient instrument for those who travel, for example. However, it can easily be seen that nowadays, electronic money is not accepted in a large number of situations; in some cases, it is impossible to use e-money even when buying things from a shop or kiosk simply due to some technical reasons. Therefore, one often has to convert their electronic money into paper money before being able to pay for a service or a product. This problem significantly limits the number of uses of e-money. The solution demands additional investments, for the installation of special technologies everywhere, is necessary for e-money to be universally accepted. Besides, these technologies would require constant support and maintenance. It would be costly if the state had to provide every kind of business with special devices. It is possible, however, to oblige all the businesses to purchase the means for accepting electronic money, but that might harm small businesses, especially the ones who only begin their activity, by demanding more investments into technologies and perhaps into additional legal procedures. It is also possible to charge the owners of the e-money for using this type of payment in the form of extra fees, for instance, and use the obtained funds to provide the businesses with the necessary technological means, but that means imposing more costs on the customers.
Asymmetric Information
Bećirović gives another example of complications which are likely to be encountered while using electronic money (31-32). These complications are connected to the issue of asymmetric information. Indeed, in relationships between the user of e-money and the institutions which maintain this paying system, there is always present informational inequality; the user usually gives the institution their data but is at the same time provided only with general information about the issuer, usually the information that the issuer has chosen to reveal to the public e.g., on their website. The user might not be aware that the institution has some complications with informational technologies that are used to create the e-money or maintain accounts, or that the issuer has some legal problems which might cause much trouble in the future.
Bećirović states that there are two main types of problems caused by asymmetric information, namely, adverse selection and moral hazard (31-32). The adverse selection means that the user, before making a contract with the institution, has to gather much data about it; this takes time and effort, the user will be likely to limit the quantity of these resources spent, which means that they will make their decision based on even more limited information than what is publicly available. There are several solutions to this challenge. The first one is connected to increasing the reliability of institutions and, therefore, the trust of the customer by obtaining accreditation from national authority. It creates a problem with international financial issuers, though, for national authorities are not always perceived as reliable in other countries. However, the issuer might obtain the support of well-known financial bodies from several countries.
The other type of problem, the moral hazard, comes from the impossibility for the customer to know how exactly the issuer will use the funds that they obtain by providing the customer with means to use e-money. The customers are likely to be reluctant to spend much time and other resources to find out how their funds are being used. It is always possible that the issuer only wants to make more money, and will use the costs they get in suboptimal, ineffective ways. Issuers may also use the funds at their disposal in many ways that are not perceived as morally acceptable by their customers. The set of solutions to this problem also includes the possibility of using a credible external body, such as a state organization, to control the utilization of the money by the issuer.
Security Issues
Among the most important problems encountered when using electronic money are security issues. Numerous security hazards to the users of electronic money come from a variety of sources. These risks are often associated with a loss or theft of information or manipulation of data sent via online messages (Alghamdi 162-163).
First, one of the most popular types of electronic payments made on the Internet is by a credit card. As the customer sends the details of their card not by using voice or pictures, but simply in written format, this data relatively easily can be collected by malevolent third parties. Besides, a customer can rarely be completely sure that a website via which they wish to pay for a product or service is indeed the provider of those products or services and not some collector of credit card information (Alghamdi 163).
Thus, there always exists a possibility that an evil third party will hack one’s account to withdraw all the costs. Perhaps this issue is less important to the owners of an electronic token, but those who hold a balanced ledger are continuously exposed to this danger. Solutions include additional security measures by the issuers; they will have to constantly upgrade the software used to protect the accounts and use other means for safeguarding. The major disadvantage, in this case, is that such security measures might be expensive, can never guarantee 100% safety, and the costs to cover them are also probable to be taken from the customers.
Second, the use of e-money, especially the money that utilizes balance ledgers, is related to another type of hazard, namely, the fact that the government of a country might be able to track and monitor, perhaps even control to a certain degree, all of the financial transactions of an individual. Even though the possibility to track all the transactions might become an effective safeguard against fraud (The Digital Money Forum n. pag.), it is a known fact that governments do not always use the power they have at their disposal to protect the citizens of their countries and help them. The possibility that a state will misuse this private information always exists. Also, governments can track and disable their political opponents by blocking their e-money accounts. This danger is hard to deal with, for it is the government that creates the laws for a state and enforces it. Thus, the government can adopt laws allowing them to use the information of e-money users, and there will be hardly any means of protecting this type of personal data. One solution comes from international law, which usually has more power than national law; the abuse of electronic money accounts should be forbidden on the international level.
Another possibility of misuse of data connected to financial transactions might come from private companies and businesses that wish to sell their products more effectively. Such enterprises may attempt to buy the information about the transactions from the issuer, and the issuer may accept the deal. Importantly, the employer of a user might wish to look at the expenditures of their employees. Such a situation might not be acceptable to many users of e-money. Therefore, it is important for legislation that would protect clients against such misuse of personal data to exist. Unlike the previous situation, where it appears possible for the government to protect its citizens from the prying eyes of those who wish to use the users’ data to their advantage by legal means.
One more way of misuse of e-money accounts also comes from the government. The state institutions can collect taxes and various fees using such accounts (Denison, Hackbart, and Yusuf 617). While citizens, of course, should pay their taxes, the governments still may utilize these accounts to charge money in dishonest ways, for instance, by imposing various fees for optional services and making issuers to charge their customers this money by default. Thus, it might be a while before a client finds out that they were being charged money for an optional service they did not need. Again, there is no way this issue can be dealt with within a particular state, and it requires protective legislation on the international level.
There exist other problems related to the security of e-money usage, but it is unlikely that each one of them can and should be discussed in this paper.
Legal Problems
There also are several legal problems connected to the use of electronic money. We will discuss a few of them.
First, electronic money might affect the state’s monopoly on the supply of money. Digital currencies might become independent from the money produced by the state, and the central banks might consider this a breach of the law (Bećirović 34). Second, it might be possible for people to carry out financial transactions in other countries, which also can cause additional legal problems about the liability of these transactions. Such problems need to be solved on the international level, or at least between particular countries taking part in such transactions.
Third, numerous legal issues connected to the problems outlined in the previous sections arise. For example, the users of e-money must be guaranteed to get enough information about their issuer (Sugiura 522); the accounts of users must always be well-protected from both malevolent third parties and the state, etc. All these problems must be regulated by legal documents in order not to cause problems to the customers.
Conclusion
To sum up, it should be highlighted that money is something which is believed by society to be a universal carrier of value. Electronic money comes in two main types: an electronic token (e.g., a card, a mobile phone) or a balanced ledger (usually transfers payments from one electronic account to another). There are a number of challenges related specifically to the use of electronic money; they include trust in and acceptance of electronic money, the risk of lost information or erased memory, problems related to the asymmetry of information that the customer and the issuer have; some legal issues; and, most importantly, security issues. These problems need to be addressed by issuers, governments, and the international community in order to be solved properly.
Works Cited
Alghamdi, Abdulhadi M. The Law of E-Commerce: E-Contracts, E-Business. Bloomington, IN: AuthorHouse, 2011. Print.
Bećirović, Suad. “Challenges Facing E-Money.” University Journal of Information Technology and Economics 1.1 (2014): 28-36. Web.
Cohen, Benjamin J. Electronic Money: New Day or False Dawn? n.d. Web.
Denison, Dwight V., Merl Hackbart, and Juita-Elena Yusuf. “Electronic Payments For State Taxes And Fees: Acceptance, Utilization, and Challenges.” Public Performance & Management Review 36.4 (2013): 616-636. Web.
European Commission. E-Money. 2014. Web.
Good, Barbara Ann. Changing Face of Money: Will Electric Money Be Adopted in the United States? New York, NY: Routledge, 2013. Print.
Sugiura, Nobuhiko. “Electronic Money and the Law: Legal Realities and Future Challenges.” Pacific Rim Law & Policy Journal 18.3 (2009): 511-524. Web.
The Digital Money Forum. That $5 Bill You Carry Around in Your Wallet Today Will Be an Anachronism Tomorrow. But What Will Replace It? n.d. Web.