end the most interesting question may be why the ach has not displaced the costlier check system even more rapidly. electronic money with that background, we now turn to our main topic, electronic money. this term is normally taken to refer to a stored - value product, where a prepaid balance of funds is recorded on a card or personal computer controlled by the consumer and updated automatically as payments are made in or out. the stored - value balance would be recorded as a liability of the institution, financial or otherwise, that issues the card. early stored - value cards recorded the account balance on magnetic strip, but magnetic strip cards can be difficult to reload and are easy to tamper with. future smart cards are likely to record stored - value through an embedded microprocessor chip which permits sophisticated encryption to protect against counterfeiting. these cards can also be used as credit cards, debit cards or repositories of other identifying information for the consumer. while much rarer, electronic money systems can also be computer - based. under these systems, variously called e - cash, cyber coins and cyberbucks, computer software generates electronic ( virtual ) tokens that serve as cash. the seller has to verify the tokens and the issuer may have to settle them – operations that at this point have proven costly and difficult. stored - value products can be used in open or closed systems. closed systems involve a narrowly defined group of consumers such as riders of a metropolitan transportation system or students at the university of michigan. the infrastructure necessary to redeem the value is in place either at transportation system terminals or owned by merchants within a relatively small geographic area. open systems involve many consumers and merchants over an extended geographic area, with the stored - value cards really functioning as electronic money. one way to assess the potential of electronic money is to analyze the benefits and costs of electronic money as compared with alternative ways of making payments. i will discuss this separately for consumers, merchants, financial institutions and the federal reserve system. while the potential gains to all groups together may not be huge, they do seem to be positive, adding to the puzzle about the slowness of adoption of stored - value technology. from the consumer ’ s standpoint, there could be many potential advantages of electronic money, but there are also risks. stored - value cards are easier to handle than either cash or checks. although most electronic money systems now do not have pin number protection, that protection is technologically possible, and

products might become an easy way for governments to pay social security benefits, unemployment insurance benefits and even welfare and food stamps. innovations are often criticized because they leave low and moderate income groups behind, but this is an innovation that might actually benefit low and moderate income groups disproportionately. returning to the protection - privacy trade - off, government crime control agencies may find stored - valued transactions easier to trace than cash transactions. but as said above, to the extent that the government may gain records of transactions, consumers will lose a corresponding degree of privacy. when this issue has come up in the past, the desire for customer privacy has clearly won out, and there is no obvious reason that the balance of political weight will shift in the future. while the potential is there for increased crime control, this potential seems unlikely to be realized. federal regulators have also had to face the issue of whether to regulate stored - value products. on the one hand, when networks are important, there is something to be said for having the government define a technology early to provide a standard for future development. as mentioned earlier, the role of the federal reserve was critical in the past development of some of our major payment systems. on the other hand, the existence of an already well - functioning payment system is an argument for a more passive governmental regulatory posture. presumably now that the main institutions are in place, payment systems can develop in ways that effectively meet consumer desires. one can imagine network externalities, but it is not obvious that the natural development of payment systems in an environment with minimal regulation will lead to serious inefficiencies. for what it is worth, federal regulators have taken the passive posture and there is at this time little federal regulation of stored - value products. summing all of this up, it seems that all groups – consumers, merchants, financial institutions and governments – can realize potential gains from electronic money. the gains will be greater, the easier it is to establish natural networks or closed systems. net gains will be correspondingly less, the more convenient alternative payment systems are. foreign experience with electronic money moving from the general to the specific, i now review the actual experience with electronic money in other developed countries. as i said earlier, adoption of electronic money products is proceeding somewhat more rapidly in some foreign countries than at home, and it makes sense to examine the reasons. electronic money pilot programs are at least in the development stage throughout much of the world. a recent survey found that fifty countries