Implications for central banks of the development of electronic money

October 1996

Abstract

This short report gives a general overview of the key features and the main policy issues that arise for central banks as a result of the development of electronic money, a novel method for making retail payments electronically that is often seen as a close substitute for cash. The report notes that there are a wide range of potential issues but focuses on those which are of particular interest to central banks. These include the security of electronic money schemes, the legal framework, monetary policy and seigniorage, and implications for payment system oversight and bank supervision.

Electronic money is a record of the funds or "value" available to a consumer stored on an electronic device in his or her possession, either on a prepaid card or on a personal computer for use over a computer network such as the Internet. The potential attraction of electronic money for consumers is convenience while the benefits for issuers include the revenue from fees (if any) and from the investment of the outstanding balances and, for some issuers, cost savings from reduced cash handling. While there are some security risks, a range of safeguards are available which should allow these risks to be controlled (for more detail, see the report on the Security of Electronic Money published by the BIS in August 1996). With respect to monetary policy, the effect of most practical significance is likely to be on the measurement of monetary aggregates, as the implementation of monetary policy should be largely unaffected unless there is a very large scale substitution of electronic money for cash. Also, except in this extreme case, the seigniorage effects are likely to be modest. In its discussion of regulatory issues, the report emphasises that, at this stage, the development of electronic money and the associated policy assessments are subject to considerable uncertainty that is likely to influence the nature and timing of any regulatory response. Designing an appropriate regulatory framework for electronic money involves balancing different objectives including the stability and financial integrity of the issuers, protection of consumers and the promotion of competition and innovation.