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On the Essentiality of E-Money

Jonathan Chiu () and Tsz-Nga Wong ()

Staff Working Papers from Bank of Canada

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 and improve the constrained optimal resource allocation. We find that, compared to cash, emoney technologies allowing limited participation, limited transferability and non-zerosum 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 nonlinear 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.

Keywords: Bank notes; E-Money; Payment clearing and settlement systems (search for similar items in EconPapers)
JEL-codes: E E4 E42 E5 E58 L5 L51 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Working Paper: On the essentiality of E-money (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:15-43

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