Electronic money is the currency that exists in banking computer systems and is used to facilitate electronic transactions. Although its value is backed by fiat currency and can be transformed into a physical form, electronic money is predominantly utilized for digital transactions.
Key Insights
- Electronic money is stored in banking computers.
- Backed by fiat currency and the central banking system.
- Services like Square and PayPal enable transactions using electronic money.
Making Sense of eMoney
Electronic money is globally used for transactions, easily accessed through electronic banking systems and managed through electronic processing. eMoney facilitates peer-to-peer and business transactions via digital apps.
Central banks, including those like the U.S. Federal Reserve and its 12 regional banks, manage and regulate electronic money. They handle fiat and maintain control over the money supply through policies and operations. Increasingly, central banks are exploring Central Bank Digital Currencies (CBDCs), which would represent a liability of the central bank and not a commercial one.
Digital Payment Processing Simplified
Americans frequently process financial transactions electronically, whether through paycheck direct deposits, moving funds via electronic transfers, or spending money through credit and debit cards.
The U.S. financial infrastructure supports a broad range of electronic payment processing networks, including Visa and Mastercard. Alternative methods like prepaid cards and digital wallets such as PayPal and Square also convert and facilitate use of fiat currency as electronic money. These options enable instant transactions, particularly within e-commerce.
eMoney vs. Cryptocurrency: A Growing Debate
Unlike eMoney, which is easily exchangeable for fiat currency and regulated by the banking system, cryptocurrencies are privately issued and not backed by financial assets. Blockchain technology ensures cryptocurrencies don’t require government regulation or oversight.
Potential Drawbacks of Electronic Money
One notable downside of electronic money is the increased potential for fraud, given that funds can transfer between parties without necessarily verifying the original owner’s identity.
The Decline of Cash in the Digital Era
In 2022, only 18% of all payments in the United States were made using cash, a clear indicator of eMoney’s rising popularity.
Understanding Digital and Mobile Wallets
A digital wallet or electronic wallet is a financial transaction application accessible on any connected device, securely storing payment information and passwords in the cloud. A subset known as mobile wallets is primarily used on smartphones and other mobile devices.
Conclusion
Electronic money represents currency maintained within banking systems, backed by fiat, and utilized via paycheck direct deposits, electronic fund transfers, and online payments. Its growing adoption underscores a shift toward digital finance in the modern economy.
Related Terms: Central Bank Digital Currency (CBDC), Digital Wallet, Electronic Fund Transfers.
References
- Board of Governors of the Federal Reserve System. “What Is a Central Bank Digital Currency?”
- Federal Reserve Bank of San Francisco. “2023 Findings from the Diary of Consumer Payment Choice”, Page 6.
