Iceland has become the first country in the world to introduce e-money that will be equal in every way to that country's fiat and used as a replacement of paper bills and minted coins. Where you stand on this as a philosophical issue is entirely up to you. However, there is some confusion as to what Iceland is doing here. Their e-money project, though based on the Ethereum blockchain, does not constitute a cryptocurrency.
There are vast differences between e-money and crypto. Understanding those differences is becoming more important as governments are embracing the use of blockchain for financial management purposes. There may be a day when a government promotes its e-money as a cryptocurrency when it really is not. People should know the difference.
This post will discuss the many differences between cryptocurrency and e-money. However, an introduction into Iceland's project is in order. Their e-money is officially known as Monerium. It was approved in mid-May 2019 and put under the authority of the Financial Supervisory Authority of Iceland (FME)
Payments and trading with Monerium
As e-money, Monerium is equivalent to fiat for paying one's bills in Iceland. It is considered legal tender despite the fact that it exists only as digits in a blockchain. For the time being, banks in Iceland will use Monerium to conduct transactions among themselves across a European network that has been in use for decades. A small number of companies will also get on board during the preliminary stages, thus testing the program's ability to handle cross-border transactions.
Using the Ethereum blockchain, Monerium's developers have created a system whereby payments can be facilitated without the need for an intermediary. That means there will be no settlement of said payments in the traditional sense of the word. Banks will send payments back and forth, as will vendors.
The key to Monerium is that it can be converted into fiat at any time without worry. Moreover, Iceland's regulators have given individual citizens the opportunity to bank with Monerium via new electronic money institutions (EMIs) that work a lot like traditional banks except that they focus only on e-money.
EMI depositors will be able to make deposits in fiat or e-money. The same goes for withdrawals. EMIs are required by law to make the conversion from Monerium to fiat on demand and without exception. They are also restricted as to how they can invest depositor funds so as to minimize risk.
In essence, Monerium is just taking the place of fiat for those who want to use it. With that said, let us get on to talking about the differences between e-money and cryptocurrency.
Centralization vs. decentralization
The first, and most glaring, difference between e-money and cryptocurrency is control. A pure cryptocurrency is decentralized from top to bottom. In other words, a cryptocurrency is not controlled by a central bank or government regulators. It is controlled by coin owners, miners, and those tasked with maintaining the technology. The same is not true for e-money.
E-money is controlled by the government and/or central bank that developed the computer code on which it is based. In the case of Monerium, is controlled by Iceland's government - particularly the FME. All the same rules that govern fiat transactions apply to Monerium transactions. There are some additional rules that apply to the e-money exclusively.
Since the FME exercises regulatory control over Monerium, they will ultimately decide its path moving forward. Monerium will be subject to whatever regulators decide about it. Meanwhile, Bitcoin and all of the other cryptocurrencies it competes with will continue on without government interference.
Legal tender vs monetary system
As previously mentioned, Monerium is considered legal tender in Iceland. It is the digital equivalent to fiat in that regard. This is normally the case with e-money. For all intents and purposes, e-money is just another way to express currency produced and regulated by government. That's why it can be counted as legal tender.
Cryptocurrencies like Bitcoin are not considered legal tender. Even in the small number of countries where they are legally recognized as monetary systems, they do not take the place of fiat. This is a big and critical difference. It explains why it is unlikely that any country in the world will adopt something like Bitcoin as its universal currency.
As long as Bitcoin remains decentralized, governments are not keen on recognizing it as legal tender. And something that is not legal tender will always remain a monetary system only. As for the difference between legal tender and a monetary system, understanding that is critical as well.
Legal tender is recognized by government as a means of settling debts. So when you pay a bill using fiat, the bill is considered paid in full at that point in which the recipient accepts the fiat and applies it to the balance due. A monetary system is simply a means of transferring funds from sender to recipient. It is not recognized as legal tender and is, therefore, not considered a recognized way to settle one's debts.
Full faith and credit
The one thing about cryptocurrency that continues to fuel skepticism among average citizens is its actual monetary value. A pure cryptocurrency is not backed by anything. There are no hard assets behind it. A cryptocurrency like Bitcoin only has value because those on the network agree to that value.
Since investors agree that Bitcoin has value, its price was hovering around USD $9,000 at the time of this writing. Because of that value, you can use Bitcoin to play slots at a wide variety of Bitcoin casinos. You can use your coins to buy a cup of coffee, pay for travel, etc.
The problem here is rudimentary: Bitcoin would be worthless if those on its network suddenly agreed that it no longer had value. Any such scenario, though unlikely to happen, would cause the market to fall out and Bitcoin to come crashing down.
To solve this problem, some people in the cryptocurrency community came up with what are known as stablecoins. These are digital currencies backed by some other hard assets like fiat currencies, commodities, etc. Facebook's new digital currency, known as GlobalCoin, is a stablecoin that will be backed by a cornucopia of fiat currencies.
All the while, a stablecoin is not the equivalent of e-money in that its existence still relies on the agreed value that exists within the coin's network. E-money is completely different in that it is backed by the full faith and credit of the government and/or central bank that issues it.
As long as Iceland's fiat maintains its value in the global economy, Monerium will also retain its value. Any company or individual that possesses Monerium and wishes to convert it to fiat, may do so without question. Monerium is nothing more than a digital representation of fiat managed via blockchain technology.
E-Money and anonymity
The final difference to consider here is one of anonymity. Regular readers of our blog may remember a post we published a few months back explaining the difference between true anonymity and pseudonymity within cryptocurrency. We explained that Bitcoin achieves security partially through pseudonymity while Monero actually achieves full anonymity for its users.
The question of anonymity or pseudonymity is a non-factor with e-money. As e-money is backed by government and considered the digital equivalent of fiat, regulators and bank officials have to maintain access to all transaction information. That means Iceland's government will be able to track Monerium transactions the same way it does fiat-based credit card transactions, debit card transactions, etc.
There will be no anonymity with Monerium. There will be no pseudonymity. Iceland consumers looking for a digital monetary system that maintains their privacy are not going to find in their country's new e-money project. The one saving grace here is that the blockchain behind Monerium will not be available as a distributed ledger open to the public. It will be a closed system maintained by banks and ultimately regulated by the FME.
You hopefully understand the key differences between e-money and cryptocurrency at this point. To summarize what we have learned, e-money is not the same thing as a cryptocurrency. It is a government-backed, central bank-controlled digital currency that takes the place of fiat for the purposes of faster and more efficient transactions over computerized networks. E-Money is legal tender as well.
Implementing an e-money project is actually on the radar for most developed countries. Iceland may be the first to officially launch its new digital currency, but they will by no means be the last. It probably will not be much longer before the UK, Canada, the U.S., and a number of other countries formally announce their own e-money plans.
In the meantime, Facebook's up-and-coming stablecoin could pave the way for an e-money system in underdeveloped nations that do not have strong fiat currencies of their own. GlobalCoin could create the financial infrastructure that would support some of those countries in developing e-money systems to replace fiat. But the stablecoin could replace fiat too. We will just not know until the coin is well on its way.