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date: 15 February 2025

Demystifying Electronic Payment Systems and Digital Currencieslocked

Demystifying Electronic Payment Systems and Digital Currencieslocked

  • Lin William Cong, Lin William CongSC Johnson College of Business, Cornell University
  • David EasleyDavid EasleyCornell University
  • , and Eswar PrasadEswar PrasadCornell University

Summary

Digital payments have transformed how consumers and businesses transact. New technologies such as mobile wallets and buy-now-pay-later financing offer additional convenience and expand access. However, the proliferation of private platforms raises concerns about market power, privacy, and stability. Since 2008, fast payment systems and decentralized cryptocurrencies have enabled direct transactions with fewer or no intermediaries, but they face challenges such as the lack of value stability and scalability. Central banks are responding by designing digital versions of fiat currencies. Retail central bank digital currencies (CBDCs) could promote financial inclusion and provide a central bank–backed alternative to private platforms. CBDCs raise complex policy trade-offs around disintermediating banks, enabling negative interest rates, preserving privacy, and coexistence with cash. International CBDCs may facilitate cheaper cross-border payments. While digital payments offer efficiency, key design choices around transaction fees and governance determine accessibility. High or unpredictable fees on blockchain platforms disproportionately affect smaller users. Initiatives that broaden token ownership help democratize networks. Tensions persist between decentralization, security, scalability, and privacy. Further research can improve digital payment technologies and clarify policy implications.

Subjects

  • Financial Economics

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