Currency Substitution under Transaction Costs

5 Pages Posted: 15 Jan 2019

See all articles by Linda Schilling

Linda Schilling

Ecole Polytechnique- CREST

Harald Uhlig

University of Chicago - Department of Economics

Date Written: January 11, 2019

Abstract

A major selling point and feature of cryptocurrencies is that they allow anonymous payments around the globe without a third party watching. For payments of certain goods, this censorship resistance feature makes cryptocurrencies more suitable or less costly a medium of exchange than traditional fiat monies such as Dollars or Euros. On the other hand, there exist goods which are easier to acquire using traditional means of payments. The costs of employing cryptocurrencies may involve fees to miners, while traditional money might be subject to taxation. In this paper, we explore how asymmetry in transaction fees across goods drives currency substitution. We assume a continuum of differentiated goods which can be strictly ordered according to the costs agents occur when purchasing these goods with Bitcoins as opposed to Dollars. In a market equilibrium, agents endogenously decide which goods to acquire using Dollars and which goods to purchase using Bitcoins. The marginal good at which agents are indifferent between purchasing with Bitcoins or Dollars depends on and varies in the size of the value-added-tax and transaction fees to miners.

Keywords: currency substitution, cryptocurrencies, Bitcoin, transaction costs, value-added tax

JEL Classification: E41, E42, F31

Suggested Citation

Schilling, Linda and Uhlig, Harald, Currency Substitution under Transaction Costs (January 11, 2019). Available at SSRN: https://ssrn.com/abstract=3314249 or http://dx.doi.org/10.2139/ssrn.3314249

Linda Schilling (Contact Author)

Ecole Polytechnique- CREST ( email )

5 Avenue Henry Le Chatelier
Palaiseau, 91120
France

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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