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The Coming Battle of Digital Currencies

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  • Cong, Lin William
  • Mayer, Simon

Abstract

We model the dynamic global competition among national fat currencies, cryptocurrencies, and Central Bank Digital Currencies (CBDCs) in which the strength of a country and of its currency are mutually reinforcing. The rise of cryptocurrencies hurts stronger fat currencies, but can beneft weaker fat currencies by reducing competition from stronger ones. Countries strategically implement CBDCs in response to competition from emerging cryptocurrencies and other currencies. Our model suggests the following pecking order: Countries with strong but non-dominant currencies (e.g., China) are most incentivized to launch CBDC due to both technological frst-mover advantage and potential reduction in dollarization; the strongest currencies (e.g., USD) beneft from developing CBDC early on to nip cryptocurrency growth in the bud and to counteract competitors’ CBDCs; nations with the weakest currencies forgo implementing CBDCs and adopt cryptocurrencies instead. Strong fat competition and the emergence of cryptocurrencies spur fnancial innovation and digital currency development. Our fndings help rationalize recent developments in currency and payment digitization, while providing insights into the global battle of currencies and the future of money.

Suggested Citation

  • Cong, Lin William & Mayer, Simon, 2022. "The Coming Battle of Digital Currencies," Applied Economics and Policy Working Paper Series 320020, Cornell University, Department of Applied Economics and Management.
    • Handle: RePEc:ags:cuaepw:320020
    DOI: 10.22004/ag.econ.320020
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    2. Verdier, Marianne, 2024. "Digital payments and bank competition," Journal of Financial Stability, Elsevier, vol. 73(C).
    3. Chod, Jiri & Lyandres, Evgeny, 2023. "Product market competition with crypto tokens and smart contracts," Journal of Financial Economics, Elsevier, vol. 149(1), pages 73-91.
    4. Mishra, Bineet & Prasad, Eswar, 2024. "A simple model of a central bank digital currency," Journal of Financial Stability, Elsevier, vol. 73(C).
    5. Scharnowski, Stefan, 2022. "Central bank speeches and digital currency competition," Finance Research Letters, Elsevier, vol. 49(C).
    6. Jean Barthélémy & Paul Gardin & Benoit Nguyen, 2023. "Stablecoins and the Financing of the Real Economy," Working papers 908, Banque de France.
    7. Karau, Sören, 2023. "Central bank digital currency competition and the impossible trinity," Finance Research Letters, Elsevier, vol. 54(C).

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