With non-traditional financial institutions engaging in electronic banking, and with real-time settlement a reality, a government has diminished control over capital flow and its country's money supply; as a consequence, the government may be hampered in its attempts to keep its country's currency strong and to serve as lender of last resort, providing stability and liquidity even in the face of financial crises.

Monetary Authority in Traditional Terms

Ideally, a country has a monetary authority that is capable of (a) managing the supply of money and credit; (b) enabling money to flow smoothly, freely and without obstruction, (c) keeping the currency stable, and (d) promoting the safety of the banking system by licensing, supervising and regulating institutions in the financial sector. The ability to exercise this influence is often associated with a country's sense of sovereignty.

Challenges for Monetary Authority in Cyberspace

Monetary authority is challenged by technology that enables unregulated players to provide financial services (e.g., settlement and clearing of accounts) over the Net. By providing services remotely, non-traditional banks can avoid regulations that come with a local presence, but still enjoy effective market access. The danger is that a country's ability to exercise monetary control dwindles, so that the monetary authority is no longer able to foster stable prices, maximum stable employment, and steady economic growth.

International Cooperation to Address These Challenges

With no single government able to tackle the problems posed by virtual banks, countries are turning to international organizations to coordinate policy. In particular, the Bank for International Settlements is studying the risks inherent in electronic money for the global financial system; so, too, this body is quietly exploring international options for carrying out monetary authority functions, with a view to warding off global financial crises.