Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/141986
Authors: 
Chiu, Jonathan
Wong, Tsz-Nga
Year of Publication: 
2015
Series/Report no.: 
Bank of Canada Staff Working Paper 2015-43
Abstract: 
Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement and improve the constrained optimal resource allocation. We find that, compared to cash, emoney technologies allowing limited participation, limited transferability and non-zerosum transfers can help mitigate fundamental frictions and enhance social welfare, if they satisfy conditions in terms of parameters such as trade frequency and bargaining powers. An optimally designed e-money system exhibits realistic arrangements including nonlinear pricing, cross-subsidization and positive interchange fees even when the technologies incur no costs. Regulations such as a cap on interchange fees (à la the Dodd- Frank Act) can distort the optimal mechanism and reduce welfare.
Subjects: 
Bank notes
E-money
Payment clearing and settlement systems
JEL: 
E4
E42
E5
E58
L5
L51
Document Type: 
Working Paper

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