The Future of Money: Electronic Cash Nowadays, what we think of as “money” is quickly changing: electronic

The Future of Money: Electronic Cash Nowadays, what we think of as “money” is quickly changing: electronic

cash has entered the picture. Electronic cash, sometimes referred to as e-cash, cybercash, or digicash, is money that is created electronically and that exists outside the world of banks, checks, coin, and currency overseen by the Federal Reserve, and is created electronically. Though still in its infancy, electronic cash exists in the computer world of the Internet and on plastic cards. Who creates this money? Just about any- one. Electronic cash is replacing traditional cash, credit cards, and checks as a medium of exchange. It is more convenient than other forms of money and can result in lower costs of transacting business.

While seen as a universal medium of exchange that can span coun- tries’ borders, the existence of electronic cash raises some important issues:

■ Who should be able to issue electronic cash? ■ Who will regulate the issuers? ■ How will transactions be monitored for compliance with tax laws? ■ How secure are these transactions? (That is, can someone else wind up

using your electronic cash?) ■ How will consumers be protected from fraudulent issuers and users? ■ How will regulators deal with money laundering and counterfeiting?

Currently, the Federal Reserve and banks are the money creators through the fractional reserve system. The emergence of electronic cash opens up money creation to almost anyone. The Fed may therefore lose its ability to control the economy by manipulating the reserve require- ment, open market operations, and the discount rate. Though there are few players in electronic cash creation today on the Internet, several joint ventures between major corporations such as Microsoft, Xerox, and AT&T will bring electronic cash to consumers in the near future.

FINANCIAL INSTITUTIONS Business entities include nonfinancial and financial enterprises. Nonfi-

nancial enterprises manufacture products (e.g., cars, steel, computers)

FOUNDATIONS

and/or provide nonfinancial services (e.g., transportation, utilities, com- puter programming). Financial enterprises, more popularly referred to as financial institutions, provide services related to one or more of the following:

1. Transforming financial assets acquired through the market and con- stituting them into a different, and more widely preferable, type of asset—which becomes their liability. This is the function performed by financial intermediaries, the most important type of financial institution.

2. Exchanging of financial assets on behalf of customers.

3. Exchanging of financial assets for their own accounts.

4. Assisting in the creation of financial assets for their customers, and then selling those financial assets to other market participants.

5. Providing investment advice to other market participants.

6. Managing the portfolios of other market participants. Financial intermediaries include depository institutions (commercial

banks, savings and loan associations, savings banks, and credit unions), which acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposits; insurance companies (life and prop- erty and casualty companies); pension funds; and finance companies.

The second and third services in the list above are the broker and dealer functions. The fourth service is referred to as underwriting. As we explain later, typically a financial intermediary that provides an under- writing service also provides a brokerage and/or dealer service. Some non- financial enterprises have subsidiaries that provide financial services. For example, many large manufacturing firms have subsidiaries that provide financing for their parent company’s customer. These financial institutions are called captive finance companies. Examples include General Motors Acceptance Corporation (a subsidiary of General Motors) and General Electric Credit Corporation (a subsidiary of General Electric).