Money is most properly viewed as a concept, rather than a thing. It is representational. Its credibility derives from the underlying tangible and intangible value, from the way it performs in normal as well as extraordinary financial circumstances.

When $100 is deposited in a savings account, the holder's $100 claim against the government is exchanged for a $100 interest-bearing claim against a bank backed by the Federal Deposit Insurance Corp.

Money typically is equated with legal tender, but the two are not necessarily the same. Electronic cash is a new iteration of money that may take some getting used to. It can be financially efficient and intellectually entertaining. It may even facilitate the Internet's development into a new financial services and payments market.

But the use of the Internet to initiate and/or consummate financial transactions changes the risk profile of each traditional or future payment product: credit-debit cards, deposit and subdeposit asset-based accounts, and stored-value or token-based digital systems. The velocity, volume, and timing of electronic payments affects both negatively and positively credit, operational, and fraud risks.

In some cases, security may improve through encrypted algorithms and digital signatures. The implementation of features such as the Secure Electronic Transactions protocol may reduce or eliminate false repudiations of credit card transactions. In other cases, risks to a financial institution may increase dramatically, as in anonymous or blind financial transactions, or when stored value has been "spawned."

The point is that the risk management profile of the payments system must be reevaluated for the handoff of electronic payment products from the Internet to the traditional clearing and settlement process. Likewise, the financial integrity and supporting guarantees provided by participating banks and other entities are of similar concern to system participants, particularly where they agree to step up to support the obligations of a faltering institution or the creditworthiness of the electronic currency itself.

Theoretically, chip-to-chip transfers of electronic currency may act like cash in some cases and never clear (i.e., they may circulate in electronic form forever. More likely, however, such forms of money simply clear later and less often than they would otherwise as checks or other negotiable instruments).

Alternatively, electronic money may take on attributes of a check, particularly when a holder wants credit for electronic value so that it can be deposited into an interest-bearing account. Thus, the point at which a token-based electronic cash equivalent enters the settlement process will likely be the time that its holder's cash management priorities preempt its payment priorities.

Unless an electronic cash product were developed that compensated its holder at a market rate of interest for the time value of its holding period, the handoff of such electronic money into the clearing and settlement process will occur when it moves from a payment to an investment. Since electronic money typically will transfer without the intervention or knowledge of the originator, the participating bank, or intervening third parties, the concept of interest on electronic money would require architectures not previously discussed by any developing system.

A collecting bank, which accepts electronic currency for deposit into a customer's account, may be required to seek settlement for the credit provided to that customer from the bank that originated the value in a traditional settlement process. However, in some systems, the identity of the bank that originated the electronic value, and to which value has traveled, may not be relevant or readily apparent. If this is the case, settlement recourse may be solely to the "central bank" in the system (the creator of the electronic value), which may not be a bank at all. The collecting bank would leapfrog several steps in the current clearing and settlement process to seek credit for the electronic value it holds. In that process, traditional safeguards, checks and balances, and conventional understandings of liability may not need to be reconfigured.

If electronic currencies gain widespread consumer acceptability and achieve the kinds of liquidity necessary to work efficiently, our financial system may be challenged in new ways. For example, the most typical point of failure in the financial services industry today is the institution. Regulators know how to contain the adverse economic effects stemming from the failure of a single or even several financial institutions at any one time. But a bank may not be the cause of financial stress in the case of a weakening or faltering electronic currency.

Consider the introduction of counterfeit electronic currency. While security systems use prevention, detection, and containment strategies to combat such exposures, such an occurrence cannot be summarily dismissed. A company engaged in the creation and delivery of electronic money is also susceptible, like any company, to financial distress. No matter the reason, system failures create a more widespread financial crisis than the failure of one bank.

The failure of a form of money may implicate many financial institutions and segments of the payments system. Indeed, without a strong brand name and financial strength behind the system, even the hint that the security of an electronic money system may have been breached and counterfeit value insinuated into it may cause a debilitating loss of confidence. In the absence of government intervention, merchants may refuse to accept such electronic money, leading consumers to abandon it and seek "real money" in exchange.

Faults in the financial integrity or credibility of electronic money may, if systemwide, be more difficult to handle than the failure of a single bank. Internal controls and external regulations will require a scrupulous adherence to capital standards by the electronic currency system's originator and participating banks. The highest levels of security must be continuously maintained, and the roles of the "central banks" or participating banks in the funding of electronic money systems bear equal consideration.

To the extent that the nature, origination, handling, and settlement of electronic money affects risks, participants must evaluate those risks and develop responsive controls. Among the principal issues to be addressed will be the protection of consumers, the security of developing systems, the possibility and magnitude of systemic failure, financial safety nets, and the role of government.

It seems likely that market tests such as Mondex in Swindon, England, and the closed stored-value systems at universities will provide the best insights and answers to these key questions. Risk management, at its highest and most sophisticated levels, must be the guiding principle for every electronic commerce participant.

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