Electronic money

Electronic money

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Electronic money is money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 or scrip
Scrip
Scrip is an American term for any substitute for currency which is not legal tender and is often a form of credit. Scrips were created as company payment of employees and also as a means of payment in times where regular money is unavailable, such as remote coal towns, military bases, ships on long...

 that is only exchanged electronically
Electronics
Electronics is the branch of science, engineering and technology that deals with electrical circuits involving active electrical components such as vacuum tubes, transistors, diodes and integrated circuits, and associated passive interconnection technologies...

. Typically, this involves the use of computer network
Computer network
A computer network, often simply referred to as a network, is a collection of hardware components and computers interconnected by communication channels that allow sharing of resources and information....

s, the internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

 and digital stored value
Stored-value card
A stored-value card refers to monetary value on a card not in an externally recorded account and differs from prepaid cards where money is on deposit with the issuer similar to a debit card...

 systems. electronic funds transfer
Electronic funds transfer
Electronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....

 (EFT), direct deposit
Giro
A Giro or giro transfer is a payment transfer from one bank account to another bank account and instigated by the payer, not the payee...

, digital gold currency
Digital gold currency
Digital gold currency is a form of electronic money based on ounces of gold. It is a kind of representative money, like a US paper gold certificate at the time that these were exchangeable for gold on demand. The typical unit of account for such currency is the gold gram or the troy ounce,...

 and virtual currency
Virtual currency
Virtual currency is used to purchase virtual goods within a variety of online communities; which include social networking websites, virtual worlds and online gaming sites....

 are all examples of electronic money. Also, it is a collective term for financial cryptography
Financial cryptography
Financial cryptography is the use of cryptography in applications in which financial loss could result from subversion of the message system.Cryptographers think of the field as originating in the work of Dr David Chaum who invented the blinded signature...

 and technologies enabling it.

While electronic money has been an interesting problem for cryptography
Cryptography
Cryptography is the practice and study of techniques for secure communication in the presence of third parties...

 (see for example the work of David Chaum
David Chaum
David Chaum is the inventor of many cryptographic protocols, including blind signature schemes, commitment schemes, and digital cash. In 1982, Chaum founded the International Association for Cryptologic Research , which currently organizes academic conferences in cryptography research...

 and Markus Jakobsson), to date, the use of e-money has been relatively low-scale. One rare success has been Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...

's Octopus card
Octopus card
The Octopus card is a rechargeable contactless stored value smart card used to transfer electronic payments in online or offline systems in Hong Kong...

 system, which started as a transit payment system
Payment system
A payment system is a system used for transferring money. What makes it a "system" is that it employs cash-substitutes; traditional payment systems are negotiable instruments such as drafts and documentary credits such as letter of credits. With the advent of computers and electronic...

 and has grown into a widely used electronic money system. London Transport
London Transport
London Transport could refer to:*London Transport Transport authorities that operated services under the brand:*London Passenger Transport Board *London Transport Executive *London Transport Board...

's Oyster card
Oyster card
The Oyster card is a form of electronic ticketing used on public transport services within the Greater London area of the United Kingdom. It is promoted by Transport for London and is valid on a number of different travel systems across London including London Underground, buses, the Docklands...

 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
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

 has an electronic money program for its public transportation system (commuter trains, bus, etc.), based on the same type of (FeliCa
FeliCa
FeliCa is a contactless RFID smart card system from Sony in Japan, primarily used in electronic money cards. The name stands for Felicity Card...

) system. The Netherlands has also implemented a nationwide electronic money system known as Chipknip for general purpose, as well as OV-Chipkaart
OV-chipkaart
The OV-chipkaart is a contactless smart card system which is in the process of being introduced on all public transport in the Netherlands, including train, metro, tram and bus...

 for transit fare collection. In Belgium, a payment service company, Proton
Proton (bank card)
Proton is an electronic purse application for debit cards in Belgium. The system was introduced in February 1995 with the goal to replace cash primarily for small transactions around the 15 EUR...

, owned by 60 Belgian banks issuing stored value cards, was developed in 1995.

A number of electronic money systems use contactless payment
Contactless payment
Contactless payment systems are credit cards and debit cards, key fobs, smartcards or other devices which use RFID for making secure payments. The embedded chip and antenna enable consumers to wave their card or fob over a reader at the point of sale. Some suppliers claim that transactions can be...

 transfer in order to facilitate easy payment and give the payee more confidence in not letting go of their electronic wallet during the transaction.

Electronic money systems


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
Private currency
A private currency is a currency issued by a private organization. It is often contrasted with fiat currency issued by governments or central banks. In many countries, the issue of private paper currencies is severely restricted by law....

 may use gold to provide extra security, such as digital gold currency
Digital gold currency
Digital gold currency is a form of electronic money based on ounces of gold. It is a kind of representative money, like a US paper gold certificate at the time that these were exchangeable for gold on demand. The typical unit of account for such currency is the gold gram or the troy ounce,...

. Some private organizations, such as the United States armed forces
United States armed forces
The United States Armed Forces are the military forces of the United States. They consist of the Army, Navy, Marine Corps, Air Force, and Coast Guard.The United States has a strong tradition of civilian control of the military...

 use independent currencies such as Eagle Cash
Eagle Cash
EagleCash and EZpay are cash management applications that use stored-value card technology to process financial transactions in "closed-loop" operating environments. The programs are sponsored by the US Department of the Treasury for the US Military...

.

Centralised systems


Many systems—such as PayPal
PayPal
PayPal is an American-based global e-commerce business allowing payments and money transfers to be made through the Internet. Online money transfers serve as electronic alternatives to paying with traditional paper methods, such as checks and money orders....

, WebMoney
WebMoney
WebMoney is an electronic money and online payment system . WM Transfer Ltd, the owner and administrator of WebMoney Transfer Online Payment System, was founded in 1998 and is a legal corporate entity of Belize, Central America. Originally targeted mainly at Russian clients, it is now used worldwide...

, cashU
CashU Inc
cashU is a prepaid online and mobile payment method available in the Middle East and North Africa, a region with a large and young population with very limited access to credit cards...

, and Hub Culture
Hub Culture
Hub Culture is a social network service that operates the global digital currency Ven, and according to its website, is "the first to merge online and physical world environments." It was founded in November 2002. The Hub Culture group of companies is privately held with offices in Bermuda, Geneva,...

's Ven
Ven (currency)
Ven is a global virtual currency used by members of a social network service Hub Culture to buy, share and trade knowledge, goods and services globally. It can be spent at any Hub Culture Pavilion or used for micropayments on the Internet at large. The value of Ven is determined on the financial...

—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
M-Pesa
M-PESA is the product name of a mobile-phone based money transfer service for Safaricom, which is a Vodafone affiliate. It was initially developed by Sagentia before transitioning to IBM...

 system.

Some community currencies
Local currency
In economics, a local currency, in its common usage, is a currency not backed by a national government , and intended to trade only in a small area. As a tool of fiscal localism, local moneys can raise awareness of the state of the local economy, especially among those who may be unfamiliar or...

, like some local exchange trading systems (LETS) and the Community Exchange System
Community Exchange System
The Community Exchange System is an Internet-based trading network which allows participants to buy and sell goods and services without using a national currency...

, work with electronic transactions.

Decentralised systems


Decentralised electronic money systems include:
  • Ripple monetary system
    Ripple monetary system
    Ripple is an open-source software project for developing and implementing a protocol for an open decentralized payment network. In its developed form , the Ripple network would be a peer-to-peer distributed social network service with a monetary honour system based on trust that already exists...

    , a monetary system based on trust networks.
  • Bitcoin
    Bitcoin
    Bitcoin is a decentralized, peer-to-peer network over which users make transactions that are tracked and verified through this network. The word Bitcoin also refers to the digital currency implemented as the currency medium for user transactions over this network...

    , a peer-to-peer electronic monetary system based on cryptography.
  • Loom — Digitally encrypted commodity exchange system, warehouse certificates that can be used as currency.

Offline "anonymous" systems


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
Double-spending
Double-spending is a failure mode of digital cash schemes, when it is possible to spend a single digital token twice. Since, unlike physical token money such as coins, electronic files can be duplicated, and hence the act of spending a digital coin does not remove its data from the ownership of the...

). 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
Ecash
Using cryptography, ecash was introduced by David Chaum as an anonymous electronic cash system. He used blind signatures to achieve unlinkability between withdrawal and spend transactions. Depending on the properties of the payment transactions, one distinguishes between on-line and off-line...

 was introduced by David Chaum
David Chaum
David Chaum is the inventor of many cryptographic protocols, including blind signature schemes, commitment schemes, and digital cash. In 1982, Chaum founded the International Association for Cryptologic Research , which currently organizes academic conferences in cryptography research...

. He used blind signature
Blind signature
In cryptography a blind signature as introduced by David Chaum is a form of digital signature in which the content of a message is disguised before it is signed. The resulting blind signature can be publicly verified against the original, unblinded message in the manner of a regular digital...

s 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 signature
Blind signature
In cryptography a blind signature as introduced by David Chaum is a form of digital signature in which the content of a message is disguised before it is signed. The resulting blind signature can be publicly verified against the original, unblinded message in the manner of a regular digital...

s.

Hard vs soft electronic currencies


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 TokenPay, Pecunix
Pecunix
Pecunix is a digital gold currency founded in 2002 by Simon Davis. Similar to competing systems such as e-gold, Pecunix allows for the instant transfer of gold between user accounts....

, Western Union
Western Union
The Western Union Company is a financial services and communications company based in the United States. Its North American headquarters is in Englewood, Colorado. Up until 2006, Western Union was the best-known U.S...

, KlickEx
KlickEx
KlickEx is a smart market company whose "registered user only" interbank retail systems include a patent pending Private electronic market, providing low cost electronic foreign exchange clearing services to selected clients Australia, New Zealand and the South Pacific.From the Company...

 and Bitcoin
Bitcoin
Bitcoin is a decentralized, peer-to-peer network over which users make transactions that are tracked and verified through this network. The word Bitcoin also refers to the digital currency implemented as the currency medium for user transactions over this network...

.

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
PayPal
PayPal is an American-based global e-commerce business allowing payments and money transfers to be made through the Internet. Online money transfers serve as electronic alternatives to paying with traditional paper methods, such as checks and money orders....

 and credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...

.

A hard currency can be softened by using a trusted third party
Trusted third party
In cryptography, a trusted third party is an entity which facilitates interactions between two parties who both trust the third party; The Third Party reviews all critical transaction communications between the parties, based on the ease of creating fraudulent digital content. In TTP models, the...

 or an escrow
Escrow
An escrow is:* an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of...

 service.

Future progression


The main focuses of electronic money development are:
  1. being able to use it through a wider range of hardware such as secured credit cards
  2. linked bank accounts that would generally be used over an internet means, for exchange with a secure micropayment
    Micropayment
    A micropayment is a financial transaction involving a very small sum of money and usually one that occurs online. PayPal defines a micropayment as a transaction of less than 12 USD while Visa prefers transactions under 20 Australian dollars, and though micropayments were originally envisioned to...

     system such as in large corporations (PayPal, KlickEx).


Mobile medical devices can assist in the medical field in ways of diagnosing patients’ illnesses and having mobile monitoring systems with alarms that have remote controlled devices. "Cell phone electronic currency" will also be available in the future. It will not only make paying without paper money, it will also replace bank cards, and life turns out to be "card less". The benefits of that not only make users more convenient, also reduce the cost of exchange system. Electronic currency has been an ongoing event, it is predicted that by the end of 2012, 360 million people will be using this feature worldwide; approximately three billion adult users can trade with electronic currency through mobile network and internet by 2014. Therefore, for those mobile network providers, "cell phone electronic currency" means huge opportunity.

Issues


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
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...

. 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).

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