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Vlasov A.V. The Evolution of E-Money

This paper analyzes the concept of electronic money in the context of the
evolutionary theory of the origin of money and put forward the hypothesis that the
emergence of cryptocurrency was the next step in the evolution of money, which
resulted due to the presence of objective disadvantages of unsecured paper money.
Literature review
The concept of electronic money is rather ambiguous. Under the electronic money,
people often understand the accounting system of rights to public and private
currency. Currently, these systems use electronic storage media. However it is
useful to note, that such systems, as well as non-cash payments, were around
thousands of years ago (Rupeika-Apoga and Nedovis, 2015; Thalassinos, 2008;
Thalassinos and Kiriazidis, 2003). Thus, the modern electronic system is only an
advanced version of the thousand-year-old technology.
While investigating electronic money from such perspective it can be said that the
modern means of bank account access: bank payment cards and internet banking are
not electronic money, as these systems simply allow operations with real money
held in bank accounts. In other words, these products only provide means of access
to real money (Huerta de Soto, J. 2008; Allegret et al., 2016; Boldeanu and Tache,
2016; Fetai, 2015; Glavina, 2015).
The problem is somewhat complicated by the fact that all modern banking system
uses the principle of fractional reserve funds that were deposited (demand deposits
and current accounts), that, in fact, is a fraud (Arslan-Ayaydin et al., 2014; Grima et
al., 2016; Suryanto, 2016; Thalassinos et al., 2013; Thalassinos et al., 2015). The
use of this principle leads to the fact that the banking system as a whole assumes
obviously impracticable obligations, leading to the fact that the volume of bank
liabilities (non-cash) far exceeds not only the quantity of cash available in the
banking system, but the entire amount of real money in the monetary base of the
economy (Rothbard, 2003; Hamid and Won Kie, 2016; Tcvetkov et al., 2015).
On the other hand, the emergence and development of means of Internet payments
(Webmoney, Yandex, through QIWI, etc.) led to the fact that there were types of
payment instruments which, although not related to the procedures of opening a
bank account, were based on P2P lending of real money and recognition of the rights
to these funds through the ledgers. Thus, the essence of this phenomenon is similar
to the “non-cash money”. However the problem of fractional reserve is still present
It is obvious that the number of phenomena that have grown in recent years and are
interpreted in the literature as "electronic money" have nothing different from other
money substituents which are backed by real monetary units such as: rubles, dollars,
gold, etc.
For example, in order to obtain electronic money (title characters) WMR, issued by
the Webmoney, it is necessary to transfer the corresponding amount in rubles to
Issuer's account. Of course, you can get these title characters from another user in
the system, but the original source of all the characters is the issuer, that is
committed to exchange titular characters for real currencies. The same applies to
other similar payment systems: «Yandex Money», «QIWI».
As a result, "electronic money" is created on the basis of the existing monetary units,
simply replacing them in certain sectors of the economy. Of course, the issuer is
able to release a larger amount of "electronic money" as opposed to real money, i.e.,
to act on the principle of fractional reserve. However, it does not mean that
"electronic money" is essentially the new kind of money, because this feature can be
inherent to any cash substitutes.
We can say that the modern "electronic money" is a natural stage in the evolution of
means of payment. However, the novelty of "electronic money" is only a technical
aspect. "Electronic money" is not a phenomenon of information. They are for
information only in the sense that they are the information on the movement of the
rights of ownership of real monetary units. Similarly, payment instruments used in
the organization of cashless payments provide identical information.
In systems that perform transactions using 'electronic money', bank accounts are
only used when depositing and withdrawing money from the system, which once
again confirms their nature as cash substitutes.
Similar to any cash substitute, "electronic money" cannot physically be more reliable
than the entity issuing them. Any money substitute assumes the existence of a
mediator, i.e., the person who accepted the obligation to exchange money substitute
for real money. In the XIX century the role of such intermediaries was devoted to
banks issuing banknotes that could be exchanged for gold. Nowadays, payment
systems, issuing "electronic money", are the intermediaries responsible for the
exchange of electronic money issued by them in exchange for real money (Shostak,
Methods of carrying out research
The research methodology is the evolutionary theory of the origin of money and the
theory of money and credit developed by the Austrian School of Economics. The
emergence of cryptocurrency is seen as the next stage in the process of money
1. The development of cryptocurrency is the new stage of money evolution
The development of IT technology and the emergence of the global network led to
development of online games, social networks and other online communities.
Those, in turn, gave rise to virtual currency and game currency, which were used to
pay for services provided within these online structures.
Virtual or game currency is a type private (non-fiat) electronic money used for
purchase and sale of virtual goods in various online communities such as: online
games, social networks, etc.
Every online game has a contest between people in the virtual world. The internal
game currency created as part of the virtual game world in which there is some
economic component present. Virtual currency, in this case currency emitted by the
game itself, is in accordance with an algorithm installed by the game developer.
Usually it is awarded to players according to their achievements in the game or
through the purchase using real money (state currency). This allows players who
have achieved certain achievements, to strengthen their position by buying in-game
virtual goods - items that give them an advantage over other players. Thus, the
virtual currency is purposefully created as a limited resource in the game. This is
achieved through the creation of game developer specific set of virtual goods sold
for real money.
Similar goals pursued by the creation of virtual money in social networks.
Any modern social network and online game is above all an enterprise that spends
real resources: labor force of programmers, capital in the form of computers, servers,
electricity, etc. Because of this, such projects cannot exist without bringing real
income. Monetizing customer base, i.e., converting the real popularity of the project
into a cash generating activity is a necessity.
Initially, popular online games used a subscription mechanism, or a monthly fee.
They demanded a fixed fee for a certain period of use of the game. This option of
generating in-game revenue didn’t require the link of internal game currency with
real money. However, a significant number of users considered the introduction of a
fixed fee worthwhile. This reduces the actual customer base relative to potential. In
simple words, the monthly fee does not allow to "pull out" the maximum amount of
money from the consumer.
Another way to monetize gaming projects was to simply sell virtual currency for real
money. By doing that, the user was able to gain advantage over other players
through the purchase of virtual goods. At the same time the game itself can be free
to download. This method can significantly improve the monetization of gaming
projects and social networks. This is achieved by the fact that the user pays as he
The next stage of the development of game currency is the ability to reverse
currency exchange from game currency to real money. This scheme is not
widespread due to lack of interest of game developers to reduce their income.
At the same time, transition to this scheme requires the producer to allow the
transfer of the internal game currency directly between the players. In this case, the
game currency market will emerge without the participation of the developer.
Despite the fact that the game currency invented by people consciously and solely as
a means of payment, it already possesses some value at the time of its inception, as a
game developer at the same time with the creation of the currency also created
virtual goods that can be bought for hard currency.
In addition, the developer has also defined a fixed rate of game currency for realworld
money. We can say that the game currency becomes just another mediator
between the user's desire to purchase a virtual good and his actual possession.
Instead of having to buy virtual goods for real money, he bought virtual currency for
real money, and only in exchange for virtual currency he may obtain the virtual
goods. Often, this intermediate process is invisible to the user. Wanting to purchase
virtual goods, he simply pays his credit card or other possible means (electronic
Thus, despite the fact that the game currency was consciously designed as a means
of payment, it is able to function as money for the reason that the developer
endowed it with value that has some significance in the virtual world that it operates
in. It has a relationship with the “everyday money” recognized by society through a
fixed exchange rate set by the developer. For this reason, virtual currency can
hardly be called fully-fledged electronic money.
The next step in the development of virtual money was the emergence of so-called
cryptocurrency, the first of which was a bitcoin. In fact cryptocurrency is what can
be truly classified as electronic money, if understood by those means of payment
available only in electronic form and in no way connected (attached or secured) to
the objects in the material world. Cryptocurrency is a form of money that exists
solely as information and has no other form of existence.
"The Bitcoin, (English bit – “Unit of information") – is an electronic monetary
system, established in 2009.
The principal difference between Bitcoin and other systems of e-money is that
bitcoin is not a monetary substitute. It is not secured by anything. Its issuer is
neither a specific person, nor a participant of the system. However, nobody at the
time of issue of bitcoin, does not undertake any obligation to exchange it for
something else at a fixed rate.
The unit of account in the system is one bitcoin. The minimum amount of the
transaction is 10 -8 Bitcoin.
Bitcoin system operates on the basis of open-source software, eliminating the
presence of hidden "loopholes" and undocumented features in the system, which
partially guarantees its reliability.
Bitcoin forms an ad hoc network, i.e., it does not provide for the presence of any
governing body. The system operates just as the interaction between users. Here,
however, it should be noted that since September 2012 the support system provides
an organization called the “Bitcoin Foundation”.
Bitcoin is not dependent on any central institution, dealing with the emission of
currency. Currency can be issued by any user in the system. The data on the
movement of money is stored in a distributed database located on the users'
computers. Database synchronization happens automatically between participants,
using an in-built peering network technology protocol (protocol similar to that used
by torrent network).
System reliability is guaranteed by the use of cryptographic protection.
Bitcoin can be sent to any user, using Bitcoin network address. However, this
address is guaranteed complete anonymity, because it is a simple combination of
letters and numbers, such as this: «1D5wZqCjxNuPqfUN3RMFsxxxtqRBwiAeTZ».
Bitcoin database stores information about all transactions, i.e. moving currency
from one address to another and etc.
User of the system holds a file that acts as a key to Bitcoin addresses connected to it.
The connection of this key with the database through a special program-purse via the
Internet, allows you to append recording of transactions in the database, i.e. make
payments. Payment is carried out immediately, but to be sure getting Bitcoins must
wait for the so-called "evidence." As a result, the payment can take from 10 minutes
to 1 hour, significantly faster than a bank transfer, but slower than the operations in
centralized systems of electronic money (Webmoney, QIWI, etc.) where the
transactions take seconds (Vlasov, 2014).
Bitcoin system does not provide for mandatory fees, however, commissioned
transactions are carried out faster.
We can say that Bitcoin is a system of electronic cash. This refers to the fact that the
loss of the key file leads to the loss of Bitcoins as access to the relevant addresses
will not be possible. Abduction of the key file is similar to the theft of cash.
A.V. Vlasov
Storage of the file is similar to storing money in your wallet. Theft of the key file
can also lead to loss of Bitcoins.
Speaking about Bitcoin, as a system of electronic cash, it must be remembered that
this is only a metaphor. Receiving Bitcoins to your address does not require
connection-wallet program to the internet. All of that is necessary for the person
paying, but not for the one receiving the payment. It is the payer that makes
additional entries in the transaction database.
The principle of an ad hoc network and the lack of a single central institution make it
impossible for government to intervene and manipulate the course through a change
in the money supply.
Currently, the principal amount of bitcoins is already issued.
The rate of emission of bitcoins has an inflexible algorithmic limitation. As a result,
the total number of bitcoins at any given time is limited. The algorithm provides for
a slowdown of the emission rate. After the issue of 10.5 million Bitcoins, emission
rate will decrease by half. Once 15,750,000 Bitcoins are issued, emission rate will
decrease two times and so on. As a result, the total Bitcoin amount will not exceed
21 million.
Table 1. The number of bitcoins in circulation
Date The number of Bitcoins in
The growth rate
for the year%
January 2016 14.44 million. + 10%
January 2017 15.75 million. + 9.1%
January 2018 16.41 million. + 4.2%
January 2019 17.06 million. + 4.0%
January 2020 17.72 million. + 3.9%
January 2021 18.37 million. + 3.7%
January 2022 18.70 million. + 1.8%
There was an opinion that the Bitcoin cannot survive for a long time. The
appreciation of the exchange rate is considered only speculation, such as the "Tulip
Fever" in the Netherlands in the first half of XVII century. There will come a point
in time when the rate begins to fall. In this situation, it can go down to zero, because
bitcoin has no support in the form of material backup. People will lose their trust in
the currency and it will cease to exist. However, this still hasn’t happened.
The Evolution of E-Money
The belief that the end of Bitcoin speculation will lead to the collapse of the
payment system is based on the fact that, in the event of it collapsing to zero, there is
no return mechanism to facilitate or manipulate the exchange rate back to normal.
Since Bitcoin does not have non-monetary demand, there will be no mechanism,
which then pushes up the exchange rate. However, these considerations have not yet
been confirmed by the facts. Moreover, such arguments ignore the fact that the
original Bitcoin was nothing and was able to obtain monetary value on the basis of
The emergence of cryptocurrency was a natural step in the process of the evolution
of money. The process of evolution is to overcome obstacles to development. Its
driving force is rationality. Any phenomenon is evolving; trying to get around the
obstacle in the most optimal way.
2. Bitcoin system lacks the disadvantages of unsecured paper money: state
intervention and resulting inflation
The development of monetary relations within the society faced the aggressive
military intervention organized groups of individuals. The emperors, feudal lords,
and later the state throughout history have used inflation as a monetary resource
withdrawals tool, i.e. theft (Vlasov, 2012a). However, by the end of the twentieth
century, the state was able to subordinate monetary sphere dictating its power,
replacing money with unsecured paper money. This allowed to significantly
increasing the scale of inflation-triggering processes, and the amount of resources
redistributed in favor of the state and stakeholders (Vlasov, 2012b).
Activities of the State in the monetary field is "parasitic" as the mechanism of
inflation takes away from the good of society, and redistributes them in favor of
"parasites" - those who do not produce. It is natural that the society for its own
survival must put in efforts to resolve this forceful intervention in the monetary
system. One way is to create a new form of money. This form will not have the
disadvantages, allowing the state to pursue a policy of inflation.
The disadvantage of gold as a form of money is that it is an object of the material
world; it can be taken away, what the state has eventually done. Any material objects
can be attacked.
The development of information technology, which began in the late 20th century
led to the fact that people have tried to create a new form of money - cryptocurrency
in which money does not exist materially, and there is only a certain algorithm, the
reliability of which is determined by the computing operations mathematics.
Intangible cryptocurrency have an advantage compared to gold (Vlasov, 2015).
A.V. Vlasov
According to the Bitcoin algorithm, the total number of bitcoins is limited, which
does not allow infinitely increasing their number to carry out a policy of inflation.
This is a significant advantage of this currency, including in relation to gold for
So far a ways hasn’t yet been found to break the algorithms and the functioning of
the system of cryptocurrency. It remains an open question as to whether
cryptocurrency is able to compete with gold for the status of money, because gold
cannot largely fulfill the function of money due to risk of government intervention.
While the State is attempting to fight cryptocurrency, it does not have, at present,
any effective means of combating this phenomenon that gives cryptocurrency
advantage over gold.
Therefore, the evolution of electronic money has led to cryptocurrency having the
following advantages compared with other forms of money:
- Completely immaterial form of money which has no collateral;
- The inability of state control over cryptocurrency;
- The impossibility of carrying out the policy of inflation.
Because of this, it is necessary to say that cryptocurrency is a consequence of
progress. This phenomenon will contribute to the development of society and
economy. However, the greatest advantage of these technologies will go to those
countries in which the state will not prevent the spread of this phenomenon.
Economies of the countries in which the state will prevent the development and
spread of these technologies will lag behind others and will be forced to adopt the
Based on this study it can be concluded that the evolution of electronic money has
led to a cryptocurrency having significant advantages over other forms of money,
which confirms the hypothesis put forward by the author.
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