In the financial world, the terms “digital money”, “e-money” and “virtual money” are often used interchangeably, sometimes leading to confusion as to their true meaning.
Behind these expressions lie distinct concepts that shape our understanding of financial transactions in an increasingly digital world. Let’s explore their many nuances.
Understanding the difference between digital money and bank money
To fully understand the concepts of digital, electronic and virtual money, we first need to look at the differences between bank and digital money.
Their main difference lies in the way they are managed and controlled. Bank money is managed and controlled by a centralised system (the banks and the government), under the supervision of the Central Bank. Digital money, on the other hand, operates via a decentralised system and is therefore controlled neither by the banks nor by the government.
Bank money corresponds to legal money. It represents the balance of bank deposits, also known as “book money”. Bank money therefore corresponds to a set of entries between accounts, and circulates by means of scriptural payment instruments (cheques, bank cheques, cards, bank transfers and direct debits).
Digital money, on the other hand, only exists in digital, i.e. intangible, form. Dematerialised and digital media may exist, but it can never have the tangible form of a cash note.
By definition, bank and digital money are both dematerialised.
Although they may or may not have a physical medium, the big difference lies in the creation and control of this money.
Types of digital money
Digital money fall into 2 main categories:
- Virtual money
- Electronic money (“e-money”)
Focus on virtual money
As a form of digital money, it is managed and controlled by a decentralised system. Virtual currency is therefore not directly linked to an official currency with a legal tender.
There are 3 types of virtual currency:
Closed virtual money: This has no link with the real, legal economy and cannot be converted into bank money. This currency is used in video games, for example, to buy packs.
One-way virtual money: This includes, for example, kitty chips, loyalty points, Airmiles, etc. Created from purchases of bank money, it is said to be unidirectional because it cannot then be converted back into legal tender.
Bidirectional virtual money: This corresponds to cryptocurrencies (Bitcoin, Ether, etc.). It is therefore a currency that can be acquired in exchange for legal tender and then converted back into legal tender.
Focus on e-money
Electronic money is the second form of digital money. There are 2 types:
- Prepaid cards (e.g. gift cards)
- Electronic wallets (e.g. PayPal)
Electronic money, which can be used without a bank account, is based on the concept of prepayment. In other words, the monetary value has already been purchased upstream by the customer, before being used (destroyed). For example, to use and pay with PayPal, the customer has to transfer money or receive money on their wallet, in bank money, which once on the wallet becomes electronic money. The same principle applies to gift cards.
Electronic money uses the same currency as legal tender. It therefore retains a link with “conventional” money because it is equal to 1 for 1, i.e. 1 euro of legal tender (bank) is equal to 1 euro of e-money.
