The Fragility of Perfectly Safe Digital Money

Elizabeth Klee, Arazi Lubis, Chase Ross, Sharon Y. Ross and Alexandros Vardoulakis
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Sharon Y. Ross: https://www.federalreserve.gov/econres/sharon-y-ross.htm
Alexandros Vardoulakis: https://www.federalreserve.gov/econres/alexandros-vardoulakis.htm

No 2026-037, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Digital money differs from previous forms of money in an important way: it unbundles trust. Instead of relying on a trustworthy institution to settle payments, it relies on decentralized verification, whose cost is priced separately through congestion-sensitive gas fees. This arrangement creates a novel fragility from the interaction of two opposing forces: network externalities, which make digital money more valuable as adoption rises, and congestion fees, which make it more costly to use. We show that these forces generate strategic complementarities in redemption decisions and can create runs even when digital money is backed by perfectly safe reserves.

Keywords: payment systems; digital currencies; cryptocurrencies; game theory; bank runs (search for similar items in EconPapers)
JEL-codes: C72 E42 E44 G01 G23 (search for similar items in EconPapers)
Pages: 70 p.
Date: 2026-06-02
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:103381

DOI: 10.17016/FEDS.2026.037

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