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The Coming Battle of Digital Currencies

Lin Cong () and Simon Mayer

No 320020, Applied Economics and Policy Working Paper Series from Cornell University, Department of Applied Economics and Management

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.

Keywords: Financial; Economics (search for similar items in EconPapers)
Date: 2022-03-28
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-ifn, nep-mon, nep-pay and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ags:cuaepw:320020

DOI: 10.22004/ag.econ.320020

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