The Future of Money in Managing Transactions


Saidislom Saidhonov

Lecturer of Economics

Management Development Institute of Singapore in Tashkent


In the era of advance in technology, the way people live has been changing significantly. This phenomenon also affects payment methods of people all over the world.  The common means of exchange as cash and cheques have being substituted by electronic means of payment. If we look back at history, money was a tangible physical substance such as gold or silver coins and even money was alive­­-cattle which was also used as money in ancient times. Nowadays, although a significant proportion of people all over the world still have been using the money for their daily transactions in the form of banknotes and coins, its amount is smaller relatively to intangible money, especially in developed countries. Who knows, perhaps cash and coins may be accepted by our future generation in the same way as we do cattle which was used as a medium of exchange by our ancestors.    

            It is really mission impossible task to find one common definition of e-money as each source refers to e-money differently. For example, some sources refer to this notion as all electronic payment schemes which are considered as intangible are considered as e-money while others assert that e-money is just money equivalence. It is undoubtedly true to say that if you ask even professional finance people even sometimes they may be confused in explaining the difference among e-money, mobile banking, mobile money, transportation money cards and other electronic cards. Can we treat all electronic cards related to cash in and cash out as e-money?  According to European Central Bank (ECB) e-money is defined as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer. The device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions.

In accordance with ECB, e-money products can be divided into two groups which are hardware-based or smart cards and software-based or network money. The former type of products is those where the purchasing power is in a particular electronic device: electronic chip card with hardware-based security. The monetary values can be transferred from one account to another by specially designed devices and they may not have need an online connection to a server. However, the latter type based products use special software which works on computers, smartphones, and other electronic devices. To make any transaction related to monetary values, the electronic devices should have the online connection with a server which operates the purchasing power.

            Now, more or less we are clear about the definition and function of e-money. The most burning issue related to the phenomenon of e-money is its impact on monetary systems. Each country tries to amend economy and make monetary policy more efficient as it is the tool to amend economy.  As Kobrin (1997) argues that e-currencies will make it difficult for central banks to manage and even measure monetary aggregates. In other words, central banks may lose its power as an institution which conducts monetary policy in economy whereas Helleiner (1998) claims that fears and pessimistic expectations are exaggerated about the future of monetary policy. Helleiner’s vision is that new forms of electronic money are likely to put a significant danger to the power of the sovereign state. As a result, this view was supported by the several types of research as Freedman (2000), Goodhart (2000) and Woodford (2000). 

            It is worthwhile to emphasize on progress between the current versions of e-money and the ancestors. Initial versions such as Monde or Digicash increased the money velocity – the flow of transactions by implementing the existing money stock. Hence, liquidity was improved although payments still needed settlements by using commercial banking system and its role was debiting or crediting corresponding third-party accounts. The advantage of such mechanism was that authorities of central banks did not have significant danger from the process and had control over the clearing mechanism. On the contrary, the recent versions like Flooz or Beenz have totally different clearing mechanism which is relatively independent from the existing money stock. New circuits of spending, based on alternative media of exchange, can evolve that make no use at all of a country’s traditional settlement system- “rootless” money “circling in cyberspace indefinitely,” which is claimed by (Solomon, 1997:75).

Even though the feasibility of full substitution banknotes and coins by e-money is high, the transformation requires time to tackle some issues related to technical problems, security against thefts and frauds, portability which does not require any dependence from the physical location and anonymity. These aforementioned problems cannot be addressed in a fast and painless manner.

However, even with the active role of government in promoting the usage of e-money, it cannot be considered as an easy-to-do task. It is true to mention that it took a quite long period of time for U.S. dollar to crowd-out the British pound sterling in international currency use in spite of the fact that the USA is considered as the world's richest economy for more than a century.  As Paul Krugman said: “The impressive fact here is surely the inertia; sterling remained the first-ranked currency for half a century after Britain had ceased to be the first-ranked economic power” (Krugman, 1992:173).  The slackness of this process contains two reasons. The first one is due to the existence of already well-established money and related transaction system which is considered as a comparative advantage over novelty. Changing from one medium of exchange to another one consists of costly procedures of financial adaptation. Huge efforts must be put in a building, creating and learning how to use new schemes, instruments, and institutions. As Kevin Dowd and David Greenaway assert: "Changing currencies is costly-we must learn to reckon in the new currency, we must change the units in which we quote prices, we might have to change our records, and so on… This explains why agents are often reluctant to switch currencies, even when the currency they are using appears to be manifestly inferior to some other” (Dowd and Greenaway 1993: 1180). Secondly, inertia is also resulted because of the high level of risk and uncertainty that is true with any choice among alternative monies. The appeal of any currency ultimately rests on an intersubjective understanding, and it is hard to be confident about its future value and usability. That uncertainty, in turn, leads to a tendency toward term namely in psychology "mimesis": the rational impulse of risk-averse actors, in conditions of contingency, to reduce anxiety by imitative behavior which is based on past experience (Cohen, 2014). Once that particular type of money earns trust and acceptance, the use of that type of money tends to be eternalized.

In order to cope with the problem of acceptance of e-money, a number of strategies can be implemented. In no uncertain terms electronic commerce has been growing, so, cyberpayment also will become more and more popular. From the US dollar example mentioned above we can make the conclusion that adoption of a new money is a slow process at the initial stages and when a critical mass is reached and get used to it, then, the majority tends to follow. To accelerate the process, effective marketing propaganda and advertising may be good tools to pursue the aim. Favorable exchange rates between “old money” and e-money, attractive interest rates, discounts and bonuses for users of e-money during purchases and investments to name but a few marketing strategies.     

The main concern of whether to introduce e-money in a broader way or not is the effect on the capability of central banks to manage the macroeconomic performance of an economy. According to analyses, it should be kept in mind that by introducing e-money the impact on the leverage of monetary policy tends to be different from economy to economy.   

The main goal of monetary policy is to pursue a balance between aggregate spending and production. Some economies pursue price stability while others focus on monetary aggregates or exchange rates.  The central bank controls the overall stock of money in circulation with the help of transmission mechanism: open money market operations, discount rate, and changing the required rate of reserves. As none of the links in the transmission mechanism is purely mechanical, there is a room for the mismatch between central-bank decisions and the actual behavior of spending. Moreover, any policy conducted by central banks has time lags.                         

If there are some competitive substitutes to a national currency such as e-money, the direct link between nominal supply and the demand of national currency tends to be broken. The central bank may still have control over money supply but in a significantly less effective way as investors and other parties will have access to alternative currency as e-money. Consequently, the economy becomes more vulnerable as the central bank has the less effective leverage to conduct monetary policy.

Also, to analyze the roots of the problem in a detailed manner, it should be kept in mind the difference between control and autonomy. The control means the central bank's technical capability to control the money supply which addresses the question whether authority may modify the stock of its own money supply at will or not. On the other hand, autonomy refers to the central bank's policy ability to adjust demand and addresses the question whether officials may adjust aggregate expenditures at will? The problem of deterritorialization, obviously, is to central-bank autonomy rather than control. Deterritorialization weakens neither the relationship between the instruments of monetary policy, open money market operations and discount rate, to bank reserves; nor the link from bank reserves to deposit creation. The central bank's capability to adjust monetary aggregates denominated in the nation's own monetary unit, therefore, is not directly influenced. So, it is the link with expenditures that is weakened - the autonomy of monetary policy due to the competitive threat posed by the availability of other substitute monetary units within the economy which is e-money. Hence, it has a direct impact on such macroeconomic indicators as price level and employment and the central bank may find it hard to have a direct impact. 

Monetary policy and its final good, money, can be treated as other goods which seek for market loyalty. The aim of the policy is to increase the demand for money locally and from abroad and sustain as well as increase a use of national currency. As economist Robert Aliber once asserted, "the dollar and Coca-Cola are both brand names... Each national central bank produces its own brand of money... Each national money is a differentiated product... Each central bank has a marketing strategy to strengthen the demand for its particular brand of money" (Aliber 1987: 153). So, the demand for some particular currencies may be raised by investing in a currency's reputation, with the government acting to enhance confidence in the money's continued value and reliability; or, alternatively, use might be forced by legal-tender restrictions, public-receivability provisions, or various measures of financial repression, up to and including the now less fashionable options of exchange or capital controls. Especially in the case of developing economies where the level of dollarization is quite high which already has made the leverage of central banks weaker, the introduction of other means of exchange by making it as the oligopolistic market may increase lags in conducting monetary policy and make it less effective.

In the traditional transmission mechanism, central banks may assume a reasonably tight connection between their own decisions and spending behavior, deterritorialization poses a tricky dilemma: how to guide overall expenditures when some part of the money supply available in the economy consists of currencies other than the traditional unit of money. The authorities may continue using transmission mechanism instruments as open-market operations and discount-rate policy to guide bank lending in national money. However, as the public has access to other monies too such as e-money, additional space for inefficiency and unpredictable lags is created in the transmission mechanism running from policy implementation to bank reserves to deposit creation.

Moreover, there are many questions which should be addressed by conducting country-specific analysis to have a precise picture about the effect of implementation of e-money in a such and such economy. How large is the supply of alternative currencies in circulation? How much spending can those alternative currencies support? And how easy is it for residents to switch back and forth between the national money and others in response to central-bank actions? In other words, how great is the cross-elasticity of substitution between currencies? These questions illustrate the aforementioned point.

As regards to the case of Uzbekistan, probably e-money tends to substitute traditional cash and Uzbekistan with other open economies should also implement e-money. However, before broad implementation of a new currency, the questions discussed above should be addressed in order to avoid any side effect associated with e-money implementation.



Aliber, Robert Z. (1987), The International Money Game, fifth edition (New York: Basic Books).

Bank for International Settlements (1996), Implications for Central Banks of the Development of Electronic Money (Basle, Switzerland).

Bank for International Settlements (1999), Central Bank Survey of Foreign Exchange and Derivatives Market Activity 1998 (Basle, Switzerland).

Bank for International Settlements (2000), Survey of Electronic Money Developments (Basle, Switzerland).

Cohen, Benjamin J. (1999), Technology, Globalization, and the Future of Money, European Union Center of the University System of Georgia, Working Paper T99-1 (available online at:

Dowd, Kevin, ed. (1992), The Experience of Free Banking (London and New York: Routledge).

Dowd, Kevin and David Greenaway (1993), "Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas," Economic Journal 103 (September), 1180-1189.

Freedman, Charles (2000), "Monetary Policy Implementation: Past, Present and Future - Will the Advent of Electronic Money Lead to the Demise of Central Banking?," paper prepared for a Conference on the Future of Monetary Policy and Banking (Washington, DC: World Bank, 11 July).

Friedman, Benjamin M. (1999), "The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps?," International Finance 2:3 (November), 321-338.

Goodhart, Charles A.E. (2000), "Can Central Banking Survive the IT Revolution?," paper prepared for a Conference on the Future of Monetary Policy and Banking (Washington, DC: World Bank, 11 July).

Helleiner, Eric (1997), One Nation, One Money: Territorial Currencies and the Nation-State, ARENA working paper no. 17 (Oslo: University of Oslo).

Helleiner, Eric (1998), "Electronic Money: A Challenge to the Sovereign State?," Journal of International Affairs 51:2 (Spring), 387-409.

Helleiner, Eric (1999), "Denationalising Money?: Economic Liberalism and the 'National Question' in Currency Affairs," in Emily Gilbert and Eric Helleiner, eds., Nation-States and Money: The Past, Present and Future of national Currencies (New York: Routledge), ch. 8.

Kindleberger, Charles P. (1989), Manias, Panics, and Crashes: A History of Financial Crises, revised edition (New York: Basic Books).

Kobrin, Stephen J. (1997), "Electronic Cash and the End of National Markets," Foreign Policy 107 (Summer), 65-77.

Kobrin, Stephen J. (1998), "Back to the Future: Neomedievalism and the Postmodern Digital World Economy," Journal of International Affairs 51:2 (Spring), 361-386.

Krugman, Paul R. (1992), "The International Role of the Dollar," in Paul R. Krugman, Currencies and Crises (Cambridge, MA: MIT Press), ch. 10.

Solomon, Elinor Harris (1997), Virtual Money: Understanding the Power and Risks of Money's High-Speed Journey into Electronic Space (New York: Oxford University Press).

Solomon, Lewis D. (1996), Rethinking Our Centralized Monetary System: The Case for a System of Local Currencies (Westport, CN: Praeger).