Cyber Money as a Medium of Exchange

Electronic money constitutes (for the time being) the most recent innovation in payment instruments. The extent to which the further spread of electronic money might have consequences for monetary policy depends not least on the actual demand for electronic money. Numerous studies have sought to answer this question. However, those studies deal for the most part with the expected spread of electronic money in over-the-counter (OTC) transactions. As far as further developments in network money are concerned, though, it has not been possible to gain anywhere near as much in the way of insights. This is particularly amazing since from a monetary policy perspective network money, in particular, threatens the central bank's monopoly on money creation. Against this background, this paper attempts to shed more light on the future spread of network money. It departs from the question as to the possible use of network money for transaction purposes. To answer this question, the paper studies a simple model which incorporates the demand for different payment media as well as their supply. In earlier studies, the influence of the supply side has in many cases only been partially included. On balance, the study shows that cyber money will most likely not completely substitute other forms of money. Rather, a specialisation of different payment media for different transaction values is probable. Specialisation here means that only one payment medium is employed to buy a good. Here, analogously to the use of electronic money in OTC trade, network money is likely to assume the role of a medium of exchange used for small-value transactions