Digital Currency and Privacy

Abstract

We develop a monetary model in which a private company issues digital currency and uses payment data to estimate consumers' preferences. Sellers purchase preference information to produce goods that better match consumers' preferences. The company does not issue digital currency if the inflation rate is sufficiently high. Due to reinforcing interactions between the value of preference information and trade volume, multiple equilibria (with and without digital currency) can exist. When left to market forces alone, socially efficient privacy utilization may not occur. If multiple digital currencies circulate in the economy, the government can achieve a Pareto improvement by imposing a price ceiling on preference information.

Keywords: Digital currency, Privacy, Transaction data, Preference information, Central bank digital currency

JEL Classification: D86, E40, E50, G10