Traditional and Digital Currencies in Over-the-Counter Markets

Abstract

To analyze how digital currencies affect trading and prices in over-the-counter markets, we introduce a search and bargaining model where agents transact in traditional and digital currencies. The digital currency has lower transaction costs, but part of the population is reluctant to use it. Maximizing each agent's expected utility, we characterize the agents' distribution in the steady state, and explicitly determine when participants of the digital currency cease to trade with non-participants. Although people unwilling or unable to use the digital currency have fewer trading opportunities, their expected utility is not diminished compared to a situation without digital currency.