Journal Article

Are on-line currencies virtual banknotes?

Abstract: The history of money is marked by innovations that have expanded the role of \"inside money\"-money created by the private sector. For instance, the past few years have seen the development of several types of on-line payment arrangements, some of which have been dubbed \"on-line currencies.\" ; This article examines the likely success or failure of on-line currencies by means of a historical analogy. The discussion compares the introduction of on-line currencies to the debut of the bearer banknote, the direct predecessor to modern currency, in London in the late 1600s. ; The key innovation of the earliest banknotes, the authors argue, was to provide final payment under circumstances in which extant payment systems could not. The discussion considers how on-line currencies may be able to fill the same role in the context of e-commerce. ; The authors note some conspicuous similarities between on-line currencies and physical banknotes. Both payment methods emerged to meet the need to conduct remote transactions (via the Internet or across physical distance), both face the risk of buyer-side fraud, and both have responded to the need for a new payment technology to allocate this risk. The authors stop short of calling on-line currencies \"virtual banknotes\" because it remains to be seen whether on-line currencies will gain sufficiently widespread acceptance to become a circulating medium of exchange.

Keywords: Money; Internet; Payment systems;

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: Economic Review

Publication Date: 2003

Volume: 88

Issue: Q2

Pages: 1-15