Foreign Exchange Implications of CBDCs and Their Integration via Bridge Coins

When several central banks decide to introduce CBDCs, interoperability requirements create demand for a common payment infrastructure and a joint digital accounting unit (bridge coin). Many attributes of the latter resemble those of private digital currencies. At the same time, the CBDC-embracing authorities actively contribute to elevating digital wallets to the position of a household technology. Private agents discover ways to make domestic and foreign payments in the (digital) currency of their choice irrespective of the CBDC-issuing authorities' intentions. In such a world, will fiat currencies and the central banks that issue them be sidetracked by the bridge coin, or are old and new forms of international transactions able to coexist? What changes await the traditional FX market? These questions are addressed in a two-country, twogood, two-currency DSGE model with a global digital currency (digicoin). Under a certain structure of FX transaction costs, all three partial FX markets coexist and the use of fiat currency in foreign trade is unlikely to be eliminated completely as long as the bridge coin operator is unable to become a global banker as well.