January 14th, 2007
The Online Currency Pyramid: Levels 1-2
This is part one in a three part series on the introduction to online and digital currency. Today’s article will only discuss the bottom two levels of this currency pyramid. Next week we will add a few new sections and complete the series. We will try to explain what makes up each category or layer and the special differences between each group. Today’s topics: (1) Online Banking (2) Online Payment Systems
Internet online banking is transacted through licensed US banks - which are of course government regulated financial institutions. These banks using customer deposited money issue ‘electronic units’ for their online banking facilities (software). This personal Internet banking access allows account holders to spend those units or transfer them over the Internet to other parties which participate in the same type of Internet Online Banking system.
Any retail Internet business which also has an online Internet banking account can spend, transfer or pay any other party online from the comfort of their home personal computer. From this level of our pyramid, to pay or receive funds, you must be an account holder at a participating bank which offers this type of online banking software.
The term ‘units’ is being used here to clarify the actual denomination of the payment. In the US, online banking clients pay bills in US Dollars but banks in other countries will be using different denominated ‘units’ in local currency like Yen, Euro or Malaysian Ringgit.
It is important to note that almost all of these online transactions can be reversed or refunded for various reasons included in the bank’s terms of service (the fine print). This bottom layer of the online currency pyramid is highly regulated in each jurisdiction by both Federal, local and private authorities.
Here are a few examples of daily online banking transactions. John Q. Public logs on to the Internet and enters his Wells Fargo Bank online account. From here he transfers funds (USD Units) paying his mortgage, phone and electric bill. Later that day, perhaps his wife Jane P. logs into the same account and pays their State Income Tax, Local Real Estate Tax and annual US Federal Income Tax.
Online banking is also available for corporate business. This bottom level is the largest level of our online currency pyramid and transacts the most business each year.
The second level of our pyramid we have labeled ‘Online Payment Systems’.
Online payment systems are privately owned businesses which operate under their local and Federal laws regarding money transfers. In the US these are considered (MSB) Money Service Businesses and in the UK, electronic money is a ‘regulated activity’ under the (FSA) Financial Services and Markets Act 2000 and the EU directive on electronic money (for more info).
In other words, ‘Online Payment Systems’ have strict Government guidelines on their cash flows and client identification. Additionally, since these laws keep crime down and terror financing out, industry insiders know it is very important to recognize and follow these laws and the spirit of all the rules and regulations.
Online payment systems are characterized by the parent company’s creation and issuance of their own private digital currency units. Adding money to an account, the client sends his funds directly to the parent company and that company issues private electronic currency units.
The account holder’s actual money is generally kept with insured banking institutions or money market funds. These newly issued electronic units are generally pegged to a local currency such as the US Dollar or Euro. Two very popular ‘Online Payment Systems’ are PayPal and Moneybookers.
Both online payment systems (companies) operate using very similar methods. In order to fund a PayPal account customers send funds directly to PayPal and it works exactly the same for Moneybookers. If you have 500 euro to deposit in your Moneybookers account you send it directly to them.
So a $100 USD deposit would fund your PayPal account with $100 dollars worth of electronic units and in this case they are USD units. A Moneybookers deposit of 100 euro would also equal a balance of $100 electronic units denominated in euro.
Once the online account is funded, users are then free to spend or transfer those units to other account holders of the same online payment system. PayPal users accept PayPal. Moneybookers accounts accept Moneybookers. There are no swaps, exchanges or payments between any other ‘online payment system’.
Transactions in this type of system are reversible and refundable for various reasons (see their TOS). As a merchant if you accept a payment, later that month it can be reversed and removed from your account according to their individual company Terms of Service. The phrase ‘chargeback’ is well known between these companies.
What makes an ‘Online Payment System’ distinct and separate from other levels of our online currency pyramid is simple to remember, they are private units and not government issued and no other agent or enterprise can exchange that company’s units into actual money except the original parent company. The Wells Fargo Bank will not swap $100’s in PayPal for a crisp Benjamin Franklin.
If you are adding funds to one of these accounts or if you want your actual money units withdrawn from an ‘Online Payment System’ you have to go back to the company who issued it. This is written in their terms of service agreements and if you break that agreement they can freeze and or seize your account. ‘Online Payment System’ companies set their own terms of service and you agree to them when you sign up. For further information see: www.paypalsucks.com, www.paypalwarning.com & www.aboutpaypal.org .
Online payment systems are safe to use and very popular. When discussing these systems they all have in common two very important similarities. The parent company is the only issuer of their electronic units and no third party agents or person can ever comes between the exchange of those units. Finally, the private electronic unit issed by the ‘Online Payment System’ is pegged directly to a local or world currency. The value in that account denominated by local currency is at risk to inflation, devaluation, currency exchange rates and a few other Internet related problems like Phishing attacks.
However, ‘Online Payment Systems’ are highly regulated, very successful online operations.
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