The evidenced decline in the decline in the use of physical cash and the innovation of the use of digital technologies to support payments and general business transactions highly support the possibility of reconfiguration of real business monetary transactions without any application of physical money. The introduction of electronic money (e-money), especially the development of the card base technologies and pre-loaded computer soft wares has promoted the optimism for a faster transition from a “physical cash society” to a “cashless society”. However, it is observed that the projections for the total elimination of physical cash in the economy has not so far proved worthwhile and essentially the usage of physical money in business activities has continued to dominate with the electronic money struggling to survive.

This paper is orderly organized into the sections. The first section attempts to examine the specific evolutionary trends that have occurred in the real business payment system critically analyzing the steps towards the electronic money and the possibility of a cashless economy. The second section of the paper identifies and examines the impacts that electronic money imposes to the central banks’ activities with specific analysis on the application of monetary policies in the economy.

The evolution of the payments system


According to the European central bank, electronic money is the computerized store of monetary value on a technically developed device, and that can be globally used for making business payments to undertakings other than the issuer by not essentially incorporating bank accounts in the process but temporary as a prepaid carrier instrument.

With the revolutionalization in the information and communication technologies, scholars have as well revolutionized their way of thinking, ending up in innovating computerized payment systems for safer and convenient execution of business transactions (Freedman, 2000).. The organization of new types of payment instruments has also being developed. With the massive advancement in technologies, communication amongst persons in different locations of the world increasingly became not only easier, safer, faster but also became considerably less expensive (Goodhart, (2000).. Progressively, much more safer and convenient money transfer technologies emerged, greatly expanding direct debits and direct credit fund transfers. With the development of the electronic cards, card systems have been increasingly developed. the usage of the electronic cards in business transactions have highly added value services to clients, services that rely on the application of the computerized network knowledge. The latest offspring of the digital revolution is the development of the electronic money. The introduction of the electronic money into the economy enhanced the way of doing business, facilitated the emergence of e-commerce and overally led to reduction of the cost of doing business. Economically, a decrease in the cost of doing business leads to increase in the revenues generated by the business and to the end of individuals, the decrease increases the savings power and all these trends promotes the growth of the economy. Besides, the development of the electronic money is considered as a great challenge to the operations and applications of the physical money in doing business and thus suggested that it could be a foundation for the emergence of a cashless economy.

According to the recent innovations of Hoenig, (1995), with the notable increase in the competition from these different business transaction platforms, the use of real cash is observed to be constrained only to a small proportion of the total value of the monetary transactions. The development and enhancement of the diverse payment methods indicates a trend towards specialism in varied types of business undertakings. In actual fact, the development of these varied modes of transacting businesses at best initially developed as a response to a particular nature of specific kinds of business transactions. Different transactions requires different modes of payment and therefore, the best mode of payment that fully and sufficiently serves the unique attributes of a specific transaction is employed, and if not available, its innovation becomes necessary (Akhtar, 1983).

However, with increased urge for simplifying the way of doing business, electronic money was developed as measure to reduce the cost, and also offer better alternative mode of settling business payments to cash, regarding small value transactions and also as an efficient way of paying for the transactions via the internet without holding real cash. This is enhanced by the use of electronic cards and/or pre-loaded computer softwares.

Challenges that electronic money poses for central banking and monetary policy

The electronic money revolution comes with promises to simplify the way of business operations and to finally replace the usage of and existence of real money in the economy. However, introduction of electronic money to the economy imposes a very great challenge to the operations of the central bank of a country. Central banks are the key regulator of the market trends and especially the interest rates and hence the introduction of electronic money impedes the moves that these banks make in an attempt to regulate these interest rates. This challenge may consequently lead to an increase in the endogenous fiscal uncertainty (Goodhart, (2000). The effect of the electronic money in relation to the control mechanisms of the interest rates by the central bank may arise from the perspective that electronic money may lower the demand of borrowing from the central bank by the other financial giants and consequently cause a series of inefficiencies in the economic sector

Effects to monetary policies

By definition, monetary policies are the processes by which the central banks (monetary authorities) of countries employ so as to manage the supply of money into the economy by overally targeting inflation rates as a way to ensure price stability and instill trust to the strength of the currency.

The high demand for electronic money has significantly revolutionalised various studies concerning the effects this new mode of settling business transactions could have to the activities and the ability of the central bank in the control of the money supply in the economy (Hoenig, 1995). Various scholars have a very strong believe that this new mode of transaction would entirely replace the physical currency where as others believe that the effects of its adoption may not be that much drastic.

The central banks’ ability to manage the supply of money in the economy depends of the sole interpretation and definition of the term money. Presently, money comprises of demand deposits, currency and traveller’s checks. However, if the application of all these variables in the economy were to reduce as a result of increased usage of electronic money, then the physical money would be considered as an accurate measure of money in the economy (Goodhart, (2000). The reduction in the capability to measure monetary aggregates limits the ability of the central bank to conduct efficient open market operations to manage the money supply. Nonetheless, the fact that electronic money is fully backed by assets and other highly valued financial instruments. In this view the urge for the central bank to conduct open market activities will gradually decrease since the money supply for business activities should spontaneously change to demand (Freedman, 2000). Additionally, if the supply of the money is believed to be constant, when the weight of the cash money slowly decreases as the adoption of the electronic money raise, then the level of the banks’ liabilities and assets will be decreased and this may bring about the weakening of the overall money supply and the market interest rates through the open market operations.

However, the fact that electronic money is based on commodities may possibly create avenues for fraudulent deals and this could force the central bank to take measures to limit such changes to the real cash money and control the growth of the electronic money. In this way, the central bank may opt to;

Impose high minimum reserve requirements on the electronic money balances.

Absorb the excess liquidity generated through the suitable monetary operations.

Treat the electronic money balances in a similar manner as to which they treat the bank currency and issue electronic money products.

In this way, the central bank will be in a position to control the general movement of the monetary aggregates even though inadequate advancement in the technology may be a limiting factor.

On another perspective, the high adoption of electronic money can affect the velocity of money. Economists consider an increase in the velocity of money in the economy as something that occurs gradually, and at the same time requires a rewarding adjustment in the base money by the bank’s reserve. It is argued that the central bank should be in a position to adjust accordingly as the changes will be obvious and gradual, and that it is not easy to measure the eventual change in the velocity of the money since income circulation velocity is determined from the relationship of the national income and the money supplied in that same period. It is therefore hard for the flow velocity due from such establishment to depict the actual money supply from the perspective of electronic payments (Goodhart, (2000). Electronic money will inexorably decrease the space and time removal of costs of transactions, and in this way, raise the amount of transactions by enhancing the convenience of the transactions. The velocity of money can therefore be observed to rise, if the electronic money is taken as a chief system of money and again included to the economic combinations used to calculate the money velocity. Business undertakings occur in real time across the globe and the costs of the transactions are significantly lowered encouraging individuals to increase their volume of transactions. On the other end, as the high velocity of transactions is healthy, its failure to quantity when the electronic money is excluded in monetary combinations limits the central banks’ power to manage the monetary policy.

Besides, increased adoption and use of the electronic money in the place of convectional currency also directly affects the multiplier theory. the introduction of this new form of money into the economy, leads to a decrease in the amount of the conventional currency and raises the value of money deposits since in such a case, there is a reduction in the private propensity to hold money (Hoenig, 1995). In this perspective, the currency ratio is decreased, the value of the money multiplier increases and the aggregate amount of supply for money generated from the supply of fixed reserve improved. Essentially, this shows that the money multiplier is directly affected by the introduction of the electronic money through the currency ratio.

There are also expectations that electronic money can completely change the nature and operations of the global trade exchange rates. Since electronic money is associated with easy transfer of funds across the nations, electronic money depended on a relatively stronger currency would tend to be preferred for transactions and hence this would lead to exchange rate instability in the financial sector and also act as a component affecting the effectiveness of the monetary policies (Akhtar, 1983). Consequently this can cause the central banks to increase the urge to recognize foreign policies and currencies so as to maintain an effective control of its home monetary components.

Existence of electronic money in the economy can lead to a loss in the interest savings that the government of a country gets through the issuance of non-interest bearing security debts in the form of currency (“seignorage income”). This kind of income is used to run the affairs of the central bank and hence, its loss could possibly lead the central banks to get into financial difficulties (Freedman, 2000). The same money is also used in funding the budget shortfalls and other government oriented programs and therefore, its loss would once again draw the governments into trouble. However, if the central bank considers treating the electronic money in the same manner in which it treats money demand deposits as well as strictly enforcing reserve requirements, then the threat of losing this income could be eliminated.

Finally, the introduction of electronic money influences the reserve requirements for banks. If for instance the reserve requirements are imposed on electronic money balances, there may be no change since it is presumed that conventional currency decreases by a similar amount as the electronic money (Akhtar, 1983). Besides, the assumption that the reserve can be set on all electronic money balances, it may not be accurate when the remote sector is responsible for the electronic cards and network but if the central bank observes counteractive measures, then it can control the associated inflationary effects in the economy which signify increased supply of money.


In conclusion, this paper reviews the key aspects of electronic money and the major policy issues that arise. It is observed that there are a number of potential issues which are of significant concern to the central banks. Further, the paper establishes that the development of technology brought forth the issue of electronic money into business undertakings, creating an interesting concern for both the financial institutions and the decision makers. However, the paper argues that electronic money can possibly become a significant mode of payment in future and that with such developments; there would be great need for monetary authorities to effectively implement monetary policies.


Akhtar, M.A., 1983. Financial innovations and their implications for monetary policy: an international perspective. Bank for International Settlements, Monetary and Economic Department.

Freedman, C., 2000. Monetary policy implementation: past, present and future-will electronic money lead to the eventual demise of central banking?. INTERNATIONAL FINANCE-OXFORD-, 3(2), pp.211-228.

Goodhart, C., (2000): “Can Central Banking Survive the IT Revolution?”, International Finance, Vol. 3 (Issue 2), 189-209.

Hoenig, T.M., 1995. The evolution of the payments system: A US perspective. Economic Review-Federal Reserve Bank of Kansas City, 80(3), p.5.

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