Electronic Money: A Challenge to the Sovereign State?

Abstract

Information technologies (IT) have been applied more extensively to the financial sector than to any other sector of the world economy. They first began to be used in a widespread manner during the 1970s and 1980s in order to increase the efficiency of processing, storing and transmitting money at the wholesale level by large financial institutions. More recently, they have also come to play a vital role in retail financial transactions. The profound influence of the application of IT to finance is apparent in the United States, for example, where payments in electronic form were estimated at U.S. $417 trillion in 1991, as compared with only U.S. $70 trillion for paper and check payments, and a mere U.S. $1.7 trillion for payments in currency and coin.(1) Money, it appears, has come to be primarily an electronic blip on a computer screen or in a database. The new electronic(2) forms of money pose important challenges to state power and control. One such challenge derives from the unprecedented mobility of money in its new electronic form. Indeed, the IT revolution is usually seen as a key cause of the dramatic globalization of financial markets in recent years, a development that has raised new questions about states' ability to regulate the movement of money. In the last few years, information technologies have also begun to be used to create entirely new forms of money, sometimes referred to as stored value devices. The importance of these new forms of money stems not just from the further mobility they may give to money, but also from the potential challenge they pose to state control over domestic monetary policy. These challenges to state power and control in the financial sector have led some analysts to suggest that the IT revolution is causing a profound transformation in the nature of the world order. A dramatic relocation of power and authority is seen to be taking place in global politics, involving the decline of the sovereign state.(3) This vision is compelling, but in this article I argue that it overstates the significance of electronic money. I highlight a number of ways that states can respond, and have already responded, to these challenges in the contemporary age. Indeed, I suggest that if states adapt effectively to the new technological world--a task that may be easier for wealthier, more powerful states--information technologies may even enhance their power in ways that have been neglected in much of the existing literature. To develop these arguments, I have organized the article in two sections: the first explores the impact of the IT revolution on the ability of sovereign states to control global financial flows, and the second examines the implications of the new forms of stored value devices for states' ability to control not only financial movements but also domestic monetary policy THE IT REVOLUTION AND STATE CONTROL OF GLOBAL FINANCIAL FLOWS Those who see the IT revolution in finance as undermining state power usually suggest that the principal significance of this revolution has been the unprecedented global mobility of capital. The costs and difficulties of moving money around the world have been dramatically reduced, as electronic money can now be moved through telecommunications channels and processed quickly and efficiently by computers. Governments are said to find electronic money impossible to control, partly due to its new quicksilver nature.(4) The digital blips of information that carry money movements along telecommunications channels are also seen as difficult for regulators to distinguish from those that relate to other kinds of information flows. Regulation is said to be further hindered because financial activity increasingly takes place in a kind of cyberspace that recognizes no borders. In Walter Wriston's words: The new world financial market is not a geographical location to be found on a map but, rather, more than two hundred thousand electronic monitors in trading rooms all over the world that are linked together. …

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