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Traditional and digital currencies in over-the-counter markets

Author

Listed:
  • Christoph Frei

    (University of Alberta)

  • Qianhong Huang

    (University of Alberta)

Abstract

To analyze how digital currencies affect trading and prices in over-the-counter markets, we introduce a search and bargaining model where agents transact in traditional and digital currencies. The digital currency has lower transaction costs, but part of the population is reluctant to use it. Maximizing each agent’s expected utility, we characterize the agents’ distribution in the steady state and explicitly determine when participants of the digital currency cease to trade with non-participants. Although people unwilling or unable to use the digital currency have fewer trading opportunities, their expected utility is not diminished compared to a situation without digital currency.

Suggested Citation

  • Christoph Frei & Qianhong Huang, 2023. "Traditional and digital currencies in over-the-counter markets," Mathematics and Financial Economics, Springer, volume 17, number 4, December.
    • Handle: RePEc:spr:mathfi:v:17:y:2023:i:3:d:10.1007_s11579-023-00341-z
    DOI: 10.1007/s11579-023-00341-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Digital currency; Payment systems; Over-the-counter markets; Stablecoins; Central bank digital currency;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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