DP17313 The digital economy, privacy, and CBDC
We develop a model of financial intermediation, payment choice, and
privacy in the digital economy. While digital payments enable merchants to sell goods online, they also reveal information to their bank. By contrast, cash guarantees anonymity, but limits distribution to less efficient offline venues. In equilibrium, merchants trade off the efficiency gains from online distribution (with digital payments) and the informational rents from staying anonymous (with cash). The introduction of central bank digital currency (CBDC) raises welfare by reducing the privacy concerns associated with online distribution. Payment tokens issued by digital platforms crowd out CBDC unless the latter facilitates data-sharing.