Electronic money (also known as e-currency, e-money, electronic cash, electronic currency, digital money, digital cash, digital currency, cyber currency) refers to money or scrip which is only exchanged electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems. Electronic Funds Transfer (EFT), direct deposit, digital gold currency and virtual currency are all examples of electronic money. Also, it is a collective term for financial cryptography and technologies enabling it.
While electronic money has been an interesting problem for cryptography (see for example the work of David Chaum and Markus Jakobsson), to date, the use of e-money has been relatively low-scale. One rare success has been Hong Kong's Octopus card system, which started as a transit payment system and has grown into a widely used electronic money system. London Transport's Oyster card system remains essentially a contactless pre-paid travelcard. Two other cities have implemented functioning electronic money systems. Very similar to Hong Kong's Octopus card, Singapore has an electronic money program for its public transportation system (commuter trains, bus, etc.), based on the same type of (FeliCa) system. The Netherlands has also implemented a nationwide electronic money system known as Chipknip for general purpose, as well as OV-Chipkaart for transit fare collection. In Belgium, a payment service company, Proton, owned by 60 Belgian banks issuing stored value cards, was developed in 1995.
A number of electronic money systems use contactless payment transfer in order to facilitate easy payment and give the payee more confidence in not letting go of their electronic wallet during the transaction.
In technical terms, electronic money is an online representation, or a system of debits and credits, used to exchange value within another system, or within itself as a stand alone system. In principle this process could also be done offline.
Occasionally, the term electronic money is also used to refer to the provider itself. A private currency may use gold to provide extra security, such as digital gold currency. Some private organizations, such as the United States armed forces use independent currencies such as Eagle Cash.
Many systems—such as PayPal, WebMoney, cashU, and Hub Culture's Ven—will sell their electronic currency directly to the end user, but other systems such as Liberty Reserve only sell through third party digital currency exchangers.
In the case of Octopus card in Hong Kong, electronic money deposits work similarly to regular bank deposits. After Octopus Card Limited receives money for deposit from users, the money is deposited into a bank. This is similar to debit-card-issuing banks redepositing money at central banks.
Africa and Afghanistan are seeing prepaid cell phone minutes being used as electronic money using the M-Pesa system.
Some community currencies, like some Local Exchange Trading Systems (LETS) and the Community Exchange System, work with electronic transactions.
In the use of offline electronic money, the merchant does not need to interact with the bank before accepting money from the user. Instead merchants can collect monies spent by users and deposit them later with the bank. In principle this could be done offline, i.e. the merchant could go to the bank with his storage media to exchange e-money for cash. Nevertheless the merchant is guaranteed that the user's e-money will either be accepted by the bank, or the bank will be able to identify and punish the cheating user. In this way a user is prevented from spending the same funds twice (double-spending). Offline e-money schemes also need to protect against cheating merchants, i.e. merchants that want to deposit money twice (and then blame the user).
Using cryptography, anonymous ecash was introduced by David Chaum. He used blind signatures to achieve unlinkability between withdrawal and spend transactions. In cryptography, e-cash usually refers to anonymous e-cash. Depending on the properties of the payment transactions, one distinguishes between online and offline e-cash. The first offline e-cash system was proposed by Chaum and Naor. Like the first on-line scheme, it is based on RSA blind signatures.
A hard electronic currency is one that does not have services to dispute or reverse charges. In other words, it only supports non-reversible transactions. Reversing transactions, even in case of a legitimate error, unauthorized use, or failure of a vendor to supply goods is difficult, if not impossible. The advantage of this arrangement is that the operating costs of the electronic currency system are greatly reduced by not having to resolve payment disputes. Additionally, it allows the electronic currency transactions to clear instantly, making the funds available immediately to the recipient. This means that using hard electronic currency is more akin to a cash transaction. Examples are Pecunix, Liberty Reserve, Western Union, KlickEx and Bitcoin.
A soft electronic currency is one that allows for reversal of payments, for example in case of fraud or disputes. Reversible payment methods generally have a "clearing time" of 72 hours or more. Examples are PayPal and credit card.
Although electronic money can provide many benefits—such as convenience and privacy, increased efficiency of transactions, lower transaction fees, and new business opportunities with the expansion of economic activities on the Internet—there are many potential issues with the use of e-money. The transfer of digital currencies raises local issues such as how to levy taxes or the possible ease of money laundering. There are also potential macro-economic effects such as exchange rate instabilities and shortage of money supplies (total amount of electronic money versus the total amount of real money available, basically the possibility that digital cash could exceed the real cash available).
