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Could CBDCs Lead to Cash Extinction? Insights from a “Merchant-Customer” Model

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  • Rodolfo Maino

    (International Monetary Fund)

  • Marco Pani

    (International Monetary Fund)

Abstract

Could the introduction of central bank digital currencies lead to the disappearance of physical cash from the payments system? This extinction would be fraught with several insidious risks, as most of the benefits of the other payments instruments hinge on the continued possibility to use cash for retail transactions. This paper investigates how the use of different payments instruments may evolve over time in a two-sided market where different types of agents can choose which instrument(s) they would use. It shows that while more instruments can continue to be used indefinitely in equilibrium, there are also cases where one instrument becomes extinct and this new equilibrium can be stable, hence, irreversible. The paper also shows that very different outcomes can be reached from very similar initial conditions, and that a minor perturbation, such as the introduction, even on a small scale, of a new instrument can lead to the eventual extinction of one instrument. These results call for caution with the introduction of digital currencies and, more generally, with the digitalization of the financial system.

Suggested Citation

  • Rodolfo Maino & Marco Pani, 2024. "Could CBDCs Lead to Cash Extinction? Insights from a “Merchant-Customer” Model," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 30(1), pages 21-45, February.
    • Handle: RePEc:kap:iaecre:v:30:y:2024:i:1:d:10.1007_s11294-024-09888-z
    DOI: 10.1007/s11294-024-09888-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Payments systems; Two-sided markets; Digitalization; CBDCs; Technological innovation;
    All these keywords.

    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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