E-Money, CBDCs, and Seigniorage

E-money rose in the 1980s and 1990s. At first, electronic money meant reloadable smartcards or internet payments (digital cash). The definition later expanded to include products that allowed people to use their bank accounts to make electronic payments, like credit cards.

Soon central banks became concerned that these competing currencies could impact the use of cash and thus monetary policy and seigniorage. In the 2000s, these concerns would rise again about cryptocurrencies. So, many of the discussions about e-money apply to crypto. And, in both cases, ideas arose of some sort of central bank digital currency to meet the challenge.

Looking at the seigniorage question, I came across a 1997 article that explored the impact of e-money if it replaces central bank fiat. It states there are two ways to deal with the problem:

1. "A way of maintaining enough seigniorage to cover [central bank] expenses could imply that central banks impose reserve requirements on e-money, provided that these requirements are not remunerated." (Today, regulators look for reserve requirements for stablecoins.)

2. "The second option to neutralize these potential losses is to restrict the issuance of e-money to central banks or to make central banks a competing issuer. In this respect, the associated question arises whether the central bank would use its own network or a network developed and operated by private issuers." (Sounds like CBDCs with a retail or wholesale model.)

The paper also raises the idea of an electronic store of value.