Frustration is the mother of invention. In my case, the frustration was caused by the friction (i.e. various charges, some overt and some hidden) in international currency transfers. On small transfers – under $1000 – the percentage cost can be enormous. In addition, the bank widens the bid-offer spread on the currency exchange, which adds a couple of extra percentage points to the cost.

I spent months evolving something I called MoneyWithWings, which was based upon a system of ‘vouchers’ purchased locally. These could be exchanged online, thereby facilitating cross-border transfers. The plan also relied upon the use of my vouchers (DollarWings, YenWings etc) in completing ecommerce transactions. This would be the Skype version of Visa, I told my friends.

I soon realised that there was a name for what I was proposing – electronic money – and that it was the subject of lengthy legislation by the EU. I soldiered on, but eventually I put the concept on ice. I was just too busy with other things at the time, the bureaucratic maze looked daunting, and the success of the venture would require achieving critical mass quickly.

I remain convinced that some form of digital money will enter the mainstream. However, achieving utopia – and digital money does represent a form of economic utopia – is going to require finding elegant solutions to the following critical issues:

1. Funds need to enter – and leave – the platform at little or no cost. There’s no point incurring the costs of processing credit card payments to credit user accounts.
2. Cross-border transactions need to happen without meddling from authorities that are paranoid about money laundering.

It goes without saying that there need to be sufficient ways of using the digital money.

There are several very successful examples of exchanges based upon something other than cash, but these are generally closed systems. Airtime is used as a form of currency in several countries across Africa. Loyalty or points systems that involve multiple retailers also approximate a kind of parallel economy.

Skype wasn’t – and probably could never have been – started by a telecom. Similarly, I’d be very surprised if a mainstream bank was behind the creation of the world’s first truly successful digital money.

Facebook could have been a likely candidate – giving itself an interesting revenue stream in the process – but its Facebook Credits were conceived for a different purpose, and possibly didn’t have a passionate advocate for disruptive digital money behind it.

I am not convinced that Bitcoin is the solution, but what it does prove is how ready the people of the world are to transact in different ways.

I haven’t used Dwolla (it’s available in the US only), but it has the appearance of being very close to the system I envisaged. Funds are held in one bank account (Dwolla’s), and transactions between users simply re-assign the right to draw on the funds.

All fiat money, in effect, operates under a voucher system, in that it is backed by the reserves of the central bank, so Dwolla is like a central bank for its users (without printing money), disintermediating commercial banks.

Dwolla appears to have cracked domestic exchanges. If they can work out a way to do international money movements as easily, they’ll have achieved something close to utopia, as far as digital money is concerned.

Xoom is another service I’ve never used, but it’s website makes a big show of how quickly and inexpensively it handles international transfers. However, once again, this is available to US customers only.

Digital money is going to be very interesting space to watch, and even more interesting to be involved in.