Central Bank Digital Cash and Cryptocurrencies: Insights from a New Baumol–Friedman Demand for Money

• Published date: 01 December 2018
• Date: 01 December 2018
• DOI: http://doi.org/10.1111/1467-8462.12304
• Author: Donato Masciandaro

Policy Forum: Cryptocurrencies

Central Bank Digital Cash and Cryptocurrencies: Insights from

a New Baumol–Friedman Demand for Money

Donato Masciandaro*

Abstract

This article analyses ongoing changes in the

supply of alternative media of payments

(MOPs). The comparison between old (cash

and deposits) and new (cryptocurrencies and

central bank digital currencies) MOPs is based

on a novel def‌inition of money where a MOP

has three properties: the f‌irst two are the

standard functions of medium of exchange

(liquidity costs) and store of value (opportunity

costs) and the third is the novel function of

store of information (privacy costs). Given

such properties and that the evolution of the

different MOPs likely depends on individual

preferences, the relevance of experimental

economics is highlighted.

1. Introduction

Would we like a central bank digital currency

(CBDC)? Would there be demand for such a

currency, and which drivers could explain that

demand? The macroeconomic interest of

these questions becomes more evident if we

observe two other recent and parallel trends

in the advanced economies: the puzzling

resilience of state-issued paper currencies

despite the wide diffusion of cashless payment

technologies and an innovation that character-

ises this diffusion of cashless payment tech-

nologies: the emergence of cryptocurrencies.

In cryptocurrencies, cryptographic techniques

are used to protect the identity of those

exchanging the currency. Those exchanges

occur peer to peer via an electronic network

that is not managed by a trusted authority (i.e.,

blockchain technology).

Today, the only type of money available to

everyone in society is paper currency, which

still represents a relevant share of the money

supply in advanced economies. In 2015, per

capita holdings of paper currency relative

to GDP was about 20 per cent in Japan,

11 per cent in Switzerland and the Eurozone,

and 8 per cent in the United States (Jobst and

Stix 2017). Even more puzzling is the fact

that circulation of paper currencies has risen

in recent years in several heterogeneous

economies (Jobst and Stix 2017; Esselink

and Hern

andez 2017; Berentsen and Schar

2018a). In fact, the circulation of global reserve

currencies has increased inside and outside the

issuing countries (Feige 2012; Judson 2012).

In addition, most of the paper currency in

circulation is in the form of large-denomination

* Department of Economics and Baff‌iCaref‌in Center,

Bocconi University, Milan 20136 Italy; email <donato.

masciandaro@unibocconi.it>.

The Australian Economic Review, vol. 51, no. 4, pp. 540–550 DOI: 10.1111/1467-8462.12304

°

C2018 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd