Payments on digital platforms: Resiliency, interoperability and welfare

Jonathan Chiu and Russell Wong

Journal of Economic Dynamics and Control, 2022, vol. 142, issue C

Abstract: Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform’s business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the liquidity costs of using cash, but also expose them to the remaining cyber risk. The platform issues tokens if the interest rate is high, the platform scope is large, and the cyber risk is small. Unbacked floating tokens with zero transaction fees or interest-bearing stablecoins can implement the equilibrium business model, which is not necessarily socially optimal because the platform does not internalize its impacts on off-platform activities. The model explains why Amazon does not issue tokens, but Alipay issues tokens circulatable outside its Alibaba platforms. Regulations such as a minimum reserve requirement can reduce welfare.

Keywords: Digital tokens; Payments; Platforms; Money; Regulation (search for similar items in EconPapers)
JEL-codes: E1 E5 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Payments on Digital Platforms: Resiliency, Interoperability and Welfare (2021)
Working Paper: Payments on Digital Platforms: Resiliency, Interoperability and Welfare (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:142:y:2022:i:c:s0165188921001081

DOI: 10.1016/j.jedc.2021.104173

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