Electronic currencies and the future of money – Part 1 – Is there a future for electronic currencies?

Electronic currencies have been around for a long time and are widely used on the Internet. Undoubtedly, electronic currencies have come to stay and will become an increasingly important part of Internet commerce. Finally, electronic currencies can become the preferred means of financial exchange between consumers and traders, and a popular means of transferring money between individuals. Popular electronic currencies include e-Gold, e-Bullion, c-Gold, Pecunix, Liberty Reserve and GoldMoney. Unfortunately, e-currencies are tainted by the association with so-called “HYIPs” (High Yield Investment Programs), which are basically scams of one kind or another that promise unrealistic “investment” returns. Even more, unfortunately, many of the characteristics of electronic currencies make them attractive to a wide variety of low-income people, including terrorists and pedophiles.

Recently, I became interested in electronic money as a way to easily send money to relatives abroad. I was just tired of the effort required to send an international bank transfer. Not only do international banking cables incur high fees for both the sender and the recipient, but they seem to raise suspicion in most U.S. bank branches. Alternative money cabling services are often even worse. And, of course, the U.S. government has a strong interest in any transfer of funds outside the U.S., of any size or frequency. Finally, electronic currencies offer the opportunity to diversify outside the US dollar, in gold-backed currency.

No wonder governments are not in love with electronic currencies. The issuance of money has long been the domain of sovereign governments around the world. Governments around the world retain the right to steal essentially from their citizens by diluting the value of the currency they have by simply printing more money. The control of the monetary system, and the monopoly of the legal use of violence, are precious privileges of any government, since the control of these is the control of the citizenry.

But these are not the concerns you will hear from the United States or other governments. They are also (legitimately) concerned about their inability to regulate the exchange of value between the parties, some of which they are supposed to protect. Coins in use by its citizens beyond its control can be easily used for all kinds of illicit activities. But addressing electronic money is a ridiculous way to frustrate the reprehensible intentions of the bottom of society. In a later article, I will directly challenge the irrational logic of the US government’s pursuit of electronic currency.

Like all currencies, the value of electronic money is directly linked to the level of confidence that consumers and traders have in the purchasing power of that currency. If the U.S. government announced tomorrow that it would issue billions of new US dollars, no one would want to be caught holding the resulting worthless newspaper the next day. Similarly, if consumers and traders do not trust a future value of electronic currencies, they will assign little or no current value to it.

Since most e-currencies are backed by gold or a cache of sovereign coins, the question of inherent value is not an issue. The challenge of any electronic currency is to respond to the potential for future devaluation through some important act of man or government. Will the company behind the e-currency suddenly disappear with all the gold? Are they lying about the 1: 1 ratio of gold to currency units in their reserves? Will a government agency suddenly seize its assets, imprison its principals, or inhibit the ability of people to exchange value through the electronic money system? In fact, e-currencies share many of the value-risk characteristics of smaller countries whose future governance is uncertain and which may have linked their own currency to the US dollar.

So what’s the future of electronic money? I think for a select handful of e-currencies, the future is really bright, although you have to be careful in the short term. It would seem equally absurd to ignore or completely trust electronic currencies. I will expand on these statements in later articles.