Data Externalities, Market Power, and the Optimal Design of Central Bank Digital Currencies

Yuteng Cheng, Jonathan Chiu, Mohammad Davoodalhosseini and Janet Hua Jiang

Staff Working Papers from Bank of Canada

Abstract: We study the optimal design of a central bank digital currency (CBDC) in an economy where private payment service providers (PSPs) collect and monetize transaction data and may have market power. Payments data create social benefits through law enforcement and monitoring but also impose privacy costs and negative externalities by enabling profiling and surplus extraction. In our model, the central bank chooses CBDC fees, transaction rewards, and data-collection intensity, taking into account their effects on private payment adoption. We show that a data-collecting CBDC can either raise or lower private payment adoption and aggregate data production relative to cash, depending on the balance between PSP market power and the social costs of privately monetized data. In a calibration to the U.S. economy, the introduction of CBDC raises aggregate data collection, private PSP market share, and PSP profits. But when PSP competition is stronger, data are more valuable, or data-processing costs are lower, the optimal CBDC policy reduces aggregate data production if negative data externalities are sufficiently strong.

Keywords: Money and payments; Digital assets and fintech; Payment and financial market infrastructures; Retail payments (search for similar items in EconPapers)
JEL-codes: G2 L14 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2026-06
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