Electronic currencies have been around for some time and are widely used on the Internet. Electronic currencies are certainly here to stay and will become an increasingly important part of Internet commerce. Eventually, electronic currencies may become the preferred means of financial exchange between consumers and merchants, 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 association with so-called “HYIPs” (High Yield Investment Programs), which are basically scams of one kind or promising another kind of unrealistic return on “investment”. Even more unfortunate, many of the characteristics of electronic currencies make them attractive to a wide variety of underworld, including terrorists and pedophiles.
I recently became interested in electronic currencies as a way to easily send money to relatives abroad. I just got tired of the effort required to send an international wire transfer. International wire transfers not only incur high fees for both sender and recipient, they seem to invoke suspicion at most US bank branches. Alternative money transfer services are often even worse. And, of course, the US government has a vested interest in any transfer of funds outside the US of any size or frequency. Finally, electronic currencies offer the opportunity to diversify away from the US dollar, into currency backed by gold.
Not surprisingly, 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 rights to essentially rob their citizens by diluting the value of the currency they own 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 US or other governments. They are also (rightfully) concerned about their inability to regulate the exchange of value between parties, some of which they are supposed to protect. Coins in use by your citizens outside of your control can easily be used for all kinds of illicit activities. But targeting electronic currencies is a ridiculous way to thwart the objectionable intentions of the most vulnerable part of society. In a later article, I will directly challenge the irrational logic of the US government’s pursuit of electronic currencies.
Like all currencies, the value of the electronic currency is directly related to the level of confidence that consumers and merchants have in the purchasing power of that currency. If the US government announced tomorrow that it was going to issue trillions of new US dollars, no one would want to be caught holding the resulting worthless paper the next morning. Similarly, if consumers and merchants have no confidence in the future value of an electronic currency, they will assign little or no current value to it.
Since most electronic currencies are backed by gold or a pool of sovereign currencies, the question of inherent value is not an issue. The challenge for any electronic currency is to respond to the potential for future devaluation by some major act of man or government. Will the company behind the electronic currency suddenly disappear with all the gold? Are they lying about the 1:1 ratio of gold to monetary units in their reserves? Will a government body suddenly seize assets, jail directors, or inhibit people’s ability to exchange value through the electronic currency system? Indeed, electronic currencies share many of the value-risk characteristics of smaller countries whose future governance is uncertain and which may have pegged their own currency to the US dollar.
So what is the future of electronic currency? I think that for a select handful of electronic currencies, the future is really bright, although one must tread carefully in the short term. It would seem equally silly to ignore electronic currencies or trust them entirely. I will expand on these claims in later articles.