How to make money using the exchange of electronic money

Digital cash will bring us benefits as well as problems. One major benefit of digital cash is its increased efficiency, which will open new business opportunities, especially for small businesses. On the other hand, it will bring us four problems: taxation and money laundering, instability of the foreign exchange rate, disturbance of money supply, and the possibility of financial crisis.

There is one important attribute of digital cash, however, that overshadows these benefits and problems. It is the transnationality of digital cash--the ability of digital cash to flow freely across national borders.

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Every bank can issue it, and everybody all over the world can use it. This transnationality is a cause for both benefits and problems and could have significant repercussions internationally. From the economic standpoint, the most important characteristic of digital cash is its transnationality.

If digital cash circulated only within a traditional national border and was controlled under a central monetary authority, there would be no economic implications that would be worth analyzing.

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In this case, digital cash would be nothing more than a convenient transaction method such as a credit card. However, digital cash is more than that.

3 Ways To Make Money With Digital Currency

Its transnationality has the potential to cause conflict between cyberspace and nation-states. If digital cash spreads successfully in the 21st century, its history may be written as a record of its battle with nation-states.

Introduction What are the economic consequences of digital cash?

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What are its implications from the viewpoint of economics? In recent years, several proposals for electronic cash have appeared in cyberspace, and some of them have begun their services already.

But the economic consequences of these endeavors have not yet been examined. Some people stress that an important economic consequence of electronic cash is the free issue of private currency by commercial banks or other nonfirms, as Hayek said in his celebrated book Denationalization of Money Hayek, ; Mantonis, ; Wall Street Journal, 23 November However, if we look at the history of money, we realize that it is not an easy task to make privately issued currency credible in the eyes of the public.

  • Possible Economic Consequences of Digital Cash
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As far as there exists a competition among banks, private banks will often end in bankruptcy, and the credibility of the privately issued currency will suffer as a result. In this paper, I discuss another consequence of digital cash. My main conclusions are as follows.

The most important characteristic of digital cash is its transnationality; digital cash has no national borders--that is, it is not controlled by any central bank of any nation-state. If digital cash circulated only within a traditional national border and was controlled under a central money authority, there would be no economic implications because, in that case, digital cash would be nothing more than a convenient transaction method such as a credit card or prepaid card.

But in reality, digital cash has no national borders--a fact that will bring both new benefits and new problems to the economy as a how to make money using the exchange of electronic money. The main benefit will be an unprecedented efficiency of international payments. The problem will be that digital cash's transnationality will tend to increase the instability of the monetary system.

In section 2, I provide a brief overview of the electronic payment system. In section 3, I discuss consequences of digital cash from the viewpoint of monetary economics. In section 4, I discuss the transnationality of digital cash and present a possible future scenario for an illustrative purpose, and in section 5, I state my conclusions.

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Overview of the electronic payment system [1] There are over a dozen proposals for electronic payment systems on the Internet. To briefly overview these proposals, let us begin with the problems we encounter when we pay a bill by sending our credit card number through the Internet. We can point out the following four problems with respect to a credit card payment through the Internet when compared to a cash payment in the real world: Security. Credit card numbers may be tapped by others because the Internet is an open system.

In the real world, we can avoid fraud by using cards only at trustworthy or familiar stores.

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In cyberspace, however, we cannot avoid the possibility of falling victim to the tapping when we send card numbers through the Internet. Credit card payments usually charge a small fee. Although this cost is low, it can be a heavy overhead cost when the payment itself is very small, say 50 cents.

As a result, credit cards cannot be used for very small payments, while cash payments can be used for even 1 cent. Peer-to-peer payments.

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Credit cards can be used only at authorized stores. Unauthorized small businesses or individuals cannot receive money via the credit card.

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In other words, credit cards cannot be used for peer-to-peer payment, while cash can be used for it, of course. Receipts from credit card payments leave records of user's expenditures to credit card companies, so credit card companies know what goods and service users bought and where and when they were bought. In other words, a user's expenditures by credit card can be traced, while cash payments are untraceable.

Electronic Money (e-money), Explained

Proposed electronic payment systems try, more or how to make money using the exchange of electronic money, to cope with these problems. According to the extent to which these systems cope with these problems, I divide them into three categories: credit-card-based, check-type, and cash-type systems. Credit-card-based systems To avoid the risk of tapping, First Virtual Holding began a payment system in which users send only their passwords instead of their credit card numbers when purchasing an item Figure 1 i.

In this system, a user registers in advance with First Virtual Holding a password and a credit card number. In purchasing goods or services at the shop on the Internet, the user sends only the password to the shop. After purchasing, the user receives a confirmation e-mail asking whether the purchase is valid. When the user replies yes to this mail, the bill is deducted from the credit card account. Because this system is simple and easy to understand, especially for people who are not computer experts, it has been diffused already to some extent.

Besides First Virtual, Visa and MasterCard are also planning a similar credit-card-based payment system using encryption technology in place of passwords.

Digital Cash by Brad Puffer In the last few years scores of companies have been formed, sporting appropriately cyber-sounding names, all aiming to be a part of the future of money.

But these credit-card-based systems solve only the security problem. As Figure 1 i shows, these systems handle only the communication between the user and the shop in cyberspace.

E-money can be used for payment transactions, with or without bank accounts. The great advantage of course is a cashless payment system that makes money transfers of any size quick and easy. Digital Currency Revolution A revolution has been taking place in the world during the past few decades, and it has nothing to do with political regimes or even economic systems. A new form of payment has been developed that is changing the way people buy and sell—probably forever.

The transaction of money remains to be done by the conventional credit card transaction system. Thus, a quick earnings per hour 100 is also necessary, and a peer-to-peer transaction is impossible. Untraceability is not guaranteed. Check-type systems The conventional check system is closer to cash than a credit card payment is, because with checking, the fees are almost zero except for the cost of a stamp, and peer-to-peer transactions are possible.

As a result, several proposals have emerged to invent checks on the Internet that would be transferable between individuals Cybercash, NetCheck, etc. As Figure 1 ii shows, in that system, a user opens an account in the bank on the Internet and issues an electronic check for the bill. The receiver of this check sends it to the bank to confirm and cash it. Security is guaranteed by both the encryption technology and the bank's confirmation process with the issuer of the check.

This system makes possible peer-to-peer payments and may reduce fees to some extent. But untraceability is still not realized because the bank can learn what the user buys and where. Cash-type systems The last and probably most difficult problem is untraceability. Untraceability is a prominent characteristic of cash.

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Untraceability keeps the transaction anonymous and prevents the dominance of Big Brother Chaum, To achieve untraceability on the Internet, encryption technology has to be fully employed because the untraceable money could be easily copied and spent twice double spending.

David Chaumand Okamoto and Ohta proposed an untraceable electronic payment system using advanced encryption technology. The mechanism in this system is similar to the electronic check, but it prevents banks from knowing who bought what Figure 1 iii. First, a user opens an account at the bank on the Internet. Then the user asks the bank to issue a certain amount of digital cash.

The bank issues that amount of digital cash using encryption technology and deducts that amount of money from the user's account. The content of digital cash is a combination of two huge integers that have a special mathematical relation. No other person but the bank can produce the data with the same relation, because the calculation for it will take an almost infinite amount time if one does not know the secret key, which only the bank knows.

Issuing digital cash means that the bank calculates these two huge integers and sends them to the user. To pay a bill with digital cash, the user sends this data to a receiver. The receiver sends this data to the bank to confirm it. If the bank confirms it, the bank credits the receiver's bank account by that amount, or issues the receiver another digital cash in the same amount.

Note that the bank can confirm only that this data digital cash is surely issued by the bank and that this data is not double-spent. The bank cannot know who used the digital cash, as long as users do not use it twice. This payment system deserves the name of "cash on the Internet" because it is almost equal to a cash payment in terms of security, fee, peer-to-peer payment, and untraceability.

So I will focus on this cash-type "digital cash" hereafter. That is the reason I use the term "digital cash" in this paper and not a broader term such as "electronic money. Consequences What are the consequences of digital cash?

The main benefit of digital cash is that it make transactions more efficient, which will in turn enlarge business opportunities and eventually pass more benefits on to the users. First, digital cash will make transactions less expensive, because the cost of transferring digital cash through the Internet is cheaper than through the conventional banking system.

To transfer money, the conventional banking system maintains many branches, clerks, automatic teller machines, and electronic transaction systems of its own.