CBDC design balances data externalities and market power
Bank of Canada researchers study the optimal design of a central bank digital currency (CBDC) in an economy where private payment providers monetize transaction data and may have market power. The paper explores how CBDC design choices affect data collection and private payment adoption.
CBDC's impact on private payment adoption
A new Bank of Canada working paper examines the optimal design of a central bank digital currency (CBDC) in an economy where private payment service providers (PSPs) collect and monetize transaction data, potentially wielding market power.
The study highlights that payments data generate social benefits for law enforcement and monitoring, but also incur privacy costs and negative externalities through profiling and surplus extraction.
The central bank's CBDC design choices, including fees, transaction rewards, and data-collection intensity, strategically influence private payment adoption.
Researchers show that a data-collecting CBDC can either increase or decrease private payment adoption and overall data production, depending on the balance between PSP market power and the social costs of privately monetized data.
A calibration to the U.S. economy suggests that introducing a CBDC typically raises aggregate data collection, private PSP market share, and their profits.
Strategic choices in CBDC design
The model incorporates three critical elements: the liquidity cost of holding payment balances, privacy concerns linked to transaction data, and the market structure and power dynamics within the payments sector.
Private providers choose their payment schemes, including fees and data policies, to maximize profits, while the central bank designs the CBDC scheme to maximize social welfare.
When private credit is used, PSPs collect and monetize data, leading to privacy loss for buyers and data externalities.
A CBDC can also collect data, incurring privacy loss and collection costs, but without private monetization.
This creates a divergence between private incentives and socially optimal data generation.
Navigating the digital data dilemma
This paper is a vital guide for central banks designing CBDCs in a data-driven economy.
It shows a CBDC can reshape market dynamics and data governance, far beyond a simple digital cash alternative.
Central banks must proactively integrate data policy to mitigate negative externalities and enhance social welfare.