In my last article, I touched upon the notion of currency and how it is defined. The definition of currency can be broad but most people consider cash or electronic money as its most predominant forms. Before I get into digital currency, I feel it is necessary to define electronic money. My research has indicated they are not interchangeable ideas but can appear to be.
Investopedia defines electric money as “money that exists in banking computer systems, which may be used to facilitate electronic transactions.” For example, my friend made an online purchase for me because he has an account with the vendor. Instead of me going to the ATM or the bank teller, I transferred the money from my bank account to his account electronically.
Neither he nor I had to physically touch the money. Immediately, as I pressed the submit button, his phone made an acknowledging “ding.” The money had been transferred in a matter of seconds.
Electronic money is backed by fiat money (discussed in the last article). It is not credit and theoretically, the bank will not let someone spend what they do not have. The bank keeps electronic records and always knows what is in storage under a particular customer’s name.
In the modern age, just about anyone can operate without ever seeing the physical money they earn through work. Many people receive their paycheck via direct deposit. Then, people can use either a debit card or an app on their phone to purchase items. These purchases can be groceries or electronics, it really does not matter what the item is. The customer can be there physically or behind the computer or phone screen.
The need to have cash in hand diminishes daily. Of course, there are always situations in which a person may need cash. Some vendors may not be set-up to accept electronic transfers. In this case, they only accept cash. Other situations might be tipping an individual for services rendered and of course illegal activity with the intent of avoiding taxes. I think it is wise to always have some cash on hand, just in case of emergencies. Think of the possibility of a massive power outage or a collapse of the internet. Under these conditions, electronic money could not be used.
Electronic money is backed by the central bank and banking institutions. When we get into the broader category of virtual currency, it then becomes more complex. Virtual currency begins to incorporate cryptocurrencies. Cryptocurrencies are digital forms of currency which are not backed by the central bank or the banking system. In my next article, I will report on the history of digital currency and the eventual evolution of what we today know as cryptocurrencies.