Traditional and Digital Currencies in Over-the-Counter Markets

Mathematics and Financial Economics 17 (2023), 457–497

44 Pages Posted: 28 Jan 2021 Last revised: 29 Aug 2023

See all articles by Christoph Frei

Christoph Frei

University of Alberta - Department of Mathematical and Statistical Sciences

Qianhong Huang

University of Alberta - Department of Mathematical and Statistical Sciences

Date Written: June 30, 2023

Abstract

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

Frei, Christoph and Huang, Qianhong, Traditional and Digital Currencies in Over-the-Counter Markets (June 30, 2023). Mathematics and Financial Economics 17 (2023), 457–497, Available at SSRN: https://ssrn.com/abstract=3744273 or http://dx.doi.org/10.2139/ssrn.3744273

Christoph Frei (Contact Author)

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada

HOME PAGE: http://www.math.ualberta.ca/~cfrei/

Qianhong Huang

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada

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