The Coming Battle of Digital Currencies
58 Pages Posted: 27 Dec 2021 Last revised: 25 Jan 2022
Date Written: December 23, 2021
We develop a dynamic general equilibrium model of global competition among national fiat currencies, cryptocurrencies, and Central Bank Digital Currencies (CBDCs) in which the strength of a country and of its currency are mutually reinforcing. The endogenous rise of cryptocurrencies hurts stronger currencies, but can benefit weaker currencies by reducing competition from stronger fiat currencies. Countries strategically implement CBDCs in response to competition from emerging cryptocurrencies and other currencies. Our model suggests the following pecking order: Countries with strong but non-dominant currencies (e.g., China) are most incentivized to launch CBDC due to both technological first-mover advantage and potential reduction in dollarization. The strongest currencies (e.g., USD) benefit from developing CBDC early on to nip cryptocurrency growth in the bud and to counteract competitors' CBDCs. Nations with the weakest currencies forgo implementing CBDCs and adopt cryptocurrencies instead. Strong fiat competition and the emergence of cryptocurrencies spur financial innovation and digital currency development. Our findings help rationalize recent developments in currency and payment digitization, while providing insights into the global battle of currencies and the future of money.
Keywords: CBDC, Cryptocurrency, Currency Competition, Digitization, Dollarization, Money, Stablecoin, Tokenomics
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