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  Category: Articles » Finance » Article

Digital Cash and how it affects you

By Nestler

What are the economic consequences of digital cash? What are its implications from the view of economics? In recent years, several proposals for electronic cash have appeared in cyberspace. In several cases, forms of digital cash are already in use. The economic consequences of these transactions have not yet been fully examined. To some observers, one important economic consequence of electronic cash is the free issue of private currency by commercial banks or other non-firms. However, if we look at the history of money, it is not easy to make privately issued currency credible in the eyes and wallets of the public. As long as there is competition between banks, private banks will sometimes become bankrupt. Nothing is more debilitating to the credibility of privately issued currency than bankruptcy. The most important characteristic of digital cash is its Trans-nationality.

Digital cash does not recognize national borders. It is not controlled by any central bank of any nation state. The unprecedented efficiency of international payments with digital cash may indeed increase the instability of the global monetary system. This efficiency indeed may lead to conflicts between digital cash providers and users and the central banks of nation states. There are over a dozen proposals for electronic payment systems on the Internet.

In comparison to using cash in the real world, transmitting a credit card number over the Internet might lead to the following difficulties. First, there is the entire question of security. Credit card numbers may be viewed by unauthorized individuals because the Internet is an open system. In the real world, there are a number of means to minimize fraud. A customer using a credit card will usually opt to carry out transactions at trustworthy or familiar facilities, stores, and markets. Second, credit cards can be used only at authorized stores. Unauthorized small businesses or individuals generally cannot carry out transactions with credit cards. In other words, credit cards cannot be used for peer-to-peer payment. Cash encourages peer-to-peer payments. Third, credit card payments usually charge a small fee. Although this cost is low, it can be a significant cost when the payment itself is very small, such as less than 20 cents. As a result, credit cards can not be used for micro-payments. A cash payment is used for even the smallest financial transactions. Finally, receipts from credit card payments leave residual records of expenditures. Those who issue credit cards know exactly what kinds of goods and services have been purchased, as well as where and when they were acquired. In other words, user's expenditures by credit card can be traced while cash payments are untraceable. Electronic payment systems, more or less, try to cope with the above issues. According to the extent to which these systems cope with these problems,

Only time will tell if the history of virtual commerce will be peaceful, successful, and tightly coupled with current operational features of the international financial community.

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