Traditional and Digital Currencies in Over-the-Counter Markets
44 Pages Posted: 28 Jan 2021 Last revised: 21 Nov 2022
Date Written: November 20, 2022
To analyze how digital currencies affect trading and prices in over-the-counter markets, we introduce a search and bargaining model where agents transact in traditional and digital currencies. The digital currency has lower transaction costs, but part of the population is reluctant to use it. Maximizing each agent's expected utility, we characterize the agents' distribution in the steady state and explicitly determine when participants of the digital currency cease to trade with non-participants. Although people unwilling or unable to use the digital currency have fewer trading opportunities, their expected utility is not diminished compared to a situation without digital currency.
Keywords: digital currency, payment systems, over-the-counter markets, stablecoins, central bank digital currency
JEL Classification: G14, G18, E42
Suggested Citation: Suggested Citation