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On the essentiality of E-money

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  • Chiu, Jonathan
  • Wong, Tsz-Nga

Abstract

Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement the optimal resource allocation. We find that, compared to cash, e-money technologies allowing limited participation, limited transferability and non-zero-sum transfers can help mitigate fundamental frictions and enhance social welfare, if they satisfy conditions in terms of parameters such as trade frequency and bargaining powers. An optimally designed e-money system exhibits realistic arrangements including non-linear pricing, cross-subsidization and positive interchange fees even when the technologies incur no costs. Regulations such as a cap on interchange fees (à la the Dodd-Frank Act) can distort the optimal mechanism and reduce welfare.

Suggested Citation

  • Chiu, Jonathan & Wong, Tsz-Nga, 2016. "On the essentiality of E-money," Working Paper Series 19474, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:19474
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    Cited by:

    1. Carli, Francesco & Uras, Burak, 2022. "Money, e-money and consumer welfare," Bank of Finland Research Discussion Papers 15/2022, Bank of Finland.
    2. Charles M. Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, 2018. "Should the Central Bank Issue E-money?," Staff Working Papers 18-58, Bank of Canada.
    3. Janet Hua & Yu Zhu, 2021. "Monetary Policy Pass-Through with Central Bank Digital Currency," Staff Working Papers 21-10, Bank of Canada.
    4. Saroj Bhattarai & Mohammad Davoodalhosseini & Zhenning Zhao, 2024. "Central Bank Digital Currency and Transmission of Monetary Policy," Staff Working Papers 24-27, Bank of Canada.
    5. Luca Marchiori, 2018. "Monetary theory reversed: Virtual currency issuance and miners’ remuneration," BCL working papers 115, Central Bank of Luxembourg.
    6. Cong, Lin William & Li, Ye & Wang, Neng, 2022. "Token-based platform finance," Journal of Financial Economics, Elsevier, vol. 144(3), pages 972-991.
    7. Walter Engert & Ben Fung, 2020. "A Uniform Currency in a Cashless Economy," Staff Analytical Notes 2020-7, Bank of Canada.
    8. Chiu, Jonathan & Wong, Tsz-Nga, 2022. "Payments on digital platforms: Resiliency, interoperability and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    9. Davoodalhosseini, Seyed Mohammadreza, 2022. "Central bank digital currency and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    10. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.
    11. Jonathan Chiu & Tsz-Nga Wong, 2014. "E-Money: Efficiency, Stability and Optimal Policy," Staff Working Papers 14-16, Bank of Canada.
    12. Wong, Tsz-Nga, 2016. "Monetary exchange and the irreducible cost of inflation," Journal of Economic Theory, Elsevier, vol. 164(C), pages 218-229.
    13. Beata Szetela & Grzegorz Mentel & Stanislaw Gedek, 2016. "Dependency analysis between Bitcoin and selected global currencies," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 16, pages 133-144.

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    More about this item

    Keywords

    Money; Electronic money; Mechanism design; Search and matching; Efficiency;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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