Working Paper
The Fragility of Perfectly Safe Digital Money
Abstract: Digital money differs from previous forms of money in an important way: it unbundles trust. Instead of relying on a trustworthy institution to settle payments, it relies on decentralized verification, whose cost is priced separately through congestion-sensitive gas fees. This arrangement creates a novel fragility from the interaction of two opposing forces: network externalities, which make digital money more valuable as adoption rises, and congestion fees, which make it more costly to use. We show that these forces generate strategic complementarities in redemption decisions and can create runs even when digital money is backed by perfectly safe reserves.
JEL Classification: C72; E42; E44; G01; G23;
https://doi.org/10.17016/FEDS.2026.037
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https://www.federalreserve.gov/econres/feds/files/2026037pap.pdf
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2026-06-02
Number: 2026-037