Monetizing Privacy with Central Bank Digital Currencies

26 Pages Posted: 20 Jan 2021 Last revised: 14 Jan 2022

See all articles by Michael Lee

Michael Lee

Federal Reserve Banks - Federal Reserve Bank of New York

Rodney Garratt

University of California, Santa Barbara (UCSB)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2021

Abstract

In a market where consumers choose between payment options, and firms compete with products and payment-vehicle specific prices, we show that payment data drives the formation of a monopoly. A data-sharing policy results in a competitive market, but it leads to a reduction in total surplus and potentially a decrease in consumer welfare. The introduction of a privacy-preserving central bank digital currency (CBDC) preserves the existing market structure and improves consumers' welfare by enabling them to better monetize their private information.

Keywords: central bank digital currency, customer data, privacy, market structure, digital cash, payments

JEL Classification: E42, L11, L15

Suggested Citation

Lee, Michael and Garratt, Rodney, Monetizing Privacy with Central Bank Digital Currencies (January 1, 2021). FRB of New York Staff Report No. 958, Available at SSRN: https://ssrn.com/abstract=3767028 or http://dx.doi.org/10.2139/ssrn.3767028

Michael Lee (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Rodney Garratt

University of California, Santa Barbara (UCSB) ( email )

South Hall 5504

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