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The Fragility of Perfectly Safe Digital Money

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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.

Suggested Citation

  • Elizabeth C. Klee & Arazi Lubis & Chase Ross & Sharon Y. Ross & Alexandros Vardoulakis, 2026. "The Fragility of Perfectly Safe Digital Money," Finance and Economics Discussion Series 2026-037, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:103381
    DOI: 10.17016/FEDS.2026.037
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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