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The evolution of e-money

The use of electronic money has become commonplace, with digital payments increasingly taking the place of transactions carried out with physical cash or cheques. And with the range of contactless payment options expanding all the time, the use of cash is declining rapidly.

Electronic money is defined as money that exists on banking computer systems and used to facilitate cashless payments, either stored on a card or phone, or over the internet. Although its value is backed by fiat currency and may, therefore, be exchanged into a physical form, electronic money is mainly used for electronic transactions.

Electronic money is most commonly used through electronic banking systems and monitored through electronic processing. As most electronic money isn’t used in physical form, most of it in bank vaults managed by central banks.

E-money also uses a well-established regulatory framework in Europe, EU rules on e-money aimed at facilitating the emergence of new, innovative and secure e-money services, providing new companies with access to the e-money market and encouraging effective competition.

The EU e-money directive (EMD) sets out the rules for the business practices and supervision of digital money institutions and also lays the foundations for a single market for services in the EU. Provisions include aligning EU requirements for digital cash services and putting in place a coherent set of requirements for obtaining a licence as an e-money institution.

The fact electronic currency can be exchanged for fiat currency distinguishes it from cryptocurrencies, but the boundaries are beginning to blur as e-money evolves. Cryptocurrencies use a decentralised system based on blockchain technology, which secures information in separate blocks linked by cryptography, which is resistant to modification of the data.

Sweden, which is one of the leading countries in terms of becoming a cashless economy, is taking steps to develop its own national cryptocurrency, the e-krona. Russia and Venezuela are also planning their own national cryptocurrencies.

In Sweden, the vast majority of everyday payments are electronic, with people rarely using cash or ATMs. In fact, notes and coins represent just one per cent of the Swedish economy, compared to 10 per cent in Europe as a whole, according to Capgemini and ABN Amro’s annual World Payments Report.

A pilot project to develop an electronic currency is being conducted by Riksbank, Sweden’s central bank, to develop a secure payment system to support a cashless economy. Riksbank has said the e-krona would not be used for major transactions and transfers between individuals, companies or authorities.

The initial focus will be to develop an e-krona that “constitutes a prepaid value without interest and with traceable transactions,” according to the bank’s second electronic currency review.

The traceable element suggests the e-krona may be a true cryptocurrency. In other words, a digital or virtual currency that uses cryptography for security.

The pilot project will investigate how to create an e-krona that can be loaded on to an app or a card to be used for payments. The central bank is also examining what legal changes will be needed to introduce an e-krona that is also connected to an account at the central bank.

While progress is being made in Sweden, Iceland is the first country to officially allow its currency to be used as electronic money over blockchain.

The Financial Supervisory Authority of Iceland (FME) approved Reykjavik-based Monerium as its first electronic money institution in June. This means Monerium has regulatory approval to provide fiat payment services for the Icelandic krona on a blockchain and use it throughout the European Economic Area.

The benefit of putting e-money on the blockchain is that it enables cross-border payments without a financial intermediary.

Monerium has suggested that working under the established EU framework for e-money is competitive advantage, with Monerium CEO and co-founder Sveinn Valfells telling CoinDesk: “For practical purposes, fiat will be the currency most people and institutions will want to use in the near- and medium-term. And if you are touching fiat in any way, you just have to comply with the relevant regulations.”

Monerium will initially operate using the ethereum blockchain, backed by blockchain software provider ConsenSys. However, it could operate across public and private distributed ledgers in the future, allowing expenditures and transfers to be made without an intermediary.

The developments in Iceland and Sweden show there is plenty of scope for e-money to evolve beyond its initial use. The use of blockchain will boost security, while also making e-money more flexible than today. And, as more countries explore the potential of e-money, the evolution of e-money will shape the future direction of digital payments more widely.

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The evolution of e-money
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