Is Privately‐provided Electronic Money Next?

Abstract

To survive, any new electronic money will need to provide some advantage to its users, such as lower transaction costs, increased privacy, a greater ability to avoid taxes, or a more stable value than its government‐provided competitors. Any successful new money will have to overcome substantial barriers to entry, however. These barriers to entry occur primarily in the form of the costs of switching to a different means of payment and require an understanding of the role played by ‘network economics.’ Unless a substantial number of the individuals and businesses with whom a person trades use the same money, any new means of payment will have little value. A temptation facing government regulators will be to extend and expand regulations to apply to new means of payment and forms of money. A more productive role of governments is to attempt to protect their own money‐creation franchises by minimising the advantages offered by privately‐provided alternatives. Governments should enforce contracts and punish fraud while remaining vigilant with respect to inflation, keep tax rates low and protect the privacy of their citizens.