The document discusses how digital currencies require digital ledgers to record transactions and ownership. It notes that different entities like tech platforms, banks, and blockchains have different approaches to controlling these digital ledgers. Tech platforms in particular have a comparative advantage in providing credit because they can bundle the ledger with other services to gain valuable information and synergies. However, platforms may also exploit their control over the ledger to increase their market power by restricting the movement of tokens and information to other platforms. Effective regulation is needed to promote competition between platforms and prevent market dominance.

1. Digital Tokens, Ledgers, Macroeconomics,
and Regulation
Jonathan Payne
(Based on work with Markus Brunnermeier)
Princeton University
Bocconi Algorand Fintech Lab Kick-off
15th September, 2022

2. Questions
? Q. What is different about digital money and ledgers?
? Q. Which institutions have a comparative advantage in providing ledgers and credit?
(Banks? Blockchains? Tech platforms?)
? Q. Will large players exploit control of their ledgers to increase market power?
? Q. How should a regulator respond? Open banking? CBDC?
? Draw on Brunnermeier & Payne (2022), “Tokens, Platforms, and Interoperability”
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 1 / 24

3. Table of Contents
Digital Monies
Ledger Control and Information Economies of Scale
Open Banking
CBDC

4. Digital Monies
Traditional Macroeconomic Thinking About Money
? Money needed because we have incomplete record keeping (“no collective memory”)
? Agents trade in physically and informationally isolated environments.
? . . . and use money because they cannot access a common ledger to write credible IOUs.
? E.g. I meet a fruit vendor on the side of the road and pay for my fruit with cash.
? All the fruit vendor needs to know is that I have enough cash to pay for the fruit.
? They do not need to know anything about my history of transactions or other activities.
? “Money is a primitive form of memory” that can used instead of a common ledger.
Good description of the role of physical cash but now we have digital currencies!
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 2 / 24

5. Digital Monies
Many Varieties of Digital “Money”
? Digital reserves at the Fed (or a Central Bank Digital Currency).
? Digital dollars in bank accounts and digital wallets.
? Bitcoin, Ether, and other fiat “cryptocurrencies”.
? USDC, Tether, and other “stablecoins”.
? Tokens on a platform or supply chain.
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 3 / 24

6. Digital Monies
Digital “Monies” Are Part of Different World
? Q. What makes all these digital monies different to physical monies?
? A. Digital monies must be accompanied by a digital ledger.
(To record ownership, transactions, and potentially much more.)
We have moved to a world where:
? Money is part of a digital ledger (not an alternative to a ledger).
? Most transactions are recorded somewhere
(not a world of unrecorded exchanges).
? Large players endogenously control the sharing of information
(rather than a world with exogeneous information frictions).
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 4 / 24

7. Digital Monies
Digital “Monies” Differ in Ledger Structure
Public Digital Monies Private Digital Monies
Cash Reserves CBDC Smart
CBDC
Bank
Account
Crypto Platform
Tokens
Issuer Govt. Govt. Govt. Govt. Bank Algorithm Platform
Ledger? 7 3 3 3 3 3 3
− Central control? - 3 3 3 3 7 3
− Transparency? - 7 7 ? 7 3 ?
− Programmability? - 7 7 3 7 3 3
Anonymity? 3 3/7 ? ? 3/7 3 7
Public access? 3 7 3 3 3 3 3
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 5 / 24

8. Digital Monies
New Ledger Technologies
? Digital currencies require ledgers!
? Which introduces new design challenges.
? And has led to the emergence of transparent, programmable ledgers with:
(E.g. Ethereum, Solana, Avalanche)
? Token accounts: that record net token wealth, and
? “Smart” contracts: with user-defined, and computer programs that automatically
executes the transactions (and other activities) specified by conditions in contract
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9. Digital Monies
Different Enforcement Paradigm for Macroeconomy
? Enforcement of “smart” contracts on a digital ledger requires:
1. Access to information flow about transactions and other activities (“oracle” problem),
2. Control of the payment flow.
? Technological change: creates a “segmented” world of enforcement:
? Legal system: imperfect enforcement in a wide range of situations,
? Digital ledger: almost perfect enforcement on the ledger; little enforcement off the ledger.
? Economic implication: need to incentivize agents to use the ledger
? Assisted by strong network effects, and
? The power to exclude.
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10. Digital Monies
Questions
? Q. What is different about digital money?
? A. It requires a ledger.
? So, we move to a world where information is recorded and potentially exploited.
Leads to many follow up questions:
? Who is likely to control the ledger?
? Who should control the ledger?
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 8 / 24

11. Table of Contents
Digital Monies
Ledger Control and Information Economies of Scale
Open Banking
CBDC

12. Ledger Control and Information Economies of Scale
Different Attempts to “Reorganize” Financial Services
1. Centralized, Programmable Ledgers.
(“Industry 4.0”, “Automated Trade/Finance Integration”, “PlatFi”)
2. Decentralized Finance. (“DeFi”, “Web 3.0”, “decentralized internet”)
3. Open Banking. (“Open Data”, “Open Architecture”)
4. Central Bank Digital Currency. (“CBDC”)
Want to understand macroeconomic implications of different systems/regulation.
(Focus of my work Brunnermeier & Payne (BP 2022))
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 8 / 24

13. Ledger Control and Information Economies of Scale
Supply Chain With Digital Ledgers (BP 2022)
? Supply chain where:
? Producers need to borrow to hire labor but lack (i) collateral and (ii) commitment
? Producers and buyers must search for opportunities to match and trade goods
? Buyers need currency for transactions
? Arrangement 1: incumbent private platform:
? Provides both a matching technology for trading goods and a centralized digital ledger,
? Uses the ledger to create tokens, organize payments, and allow agents to write contracts.
? We consider a ledger that is used anonymously (e.g. for cross-country transactions)
? E.g. Ebay/Amazon/Alibaba with centrally controlled ledger that firms contract on.
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14. Ledger Control and Information Economies of Scale
Platform Can Creates Synergies
? Platform can incentivize producers (debt holders) to deanonymize themselves by:
? Forcing producers to post a contract to repay when they search matching tech.
? . . . so producers must deanonymize themselves or be excluded from matching technology.
? ⇒ Mitigates (possibly solves) the “anonymity” problem!
? Platform shares information about trades and debtor identities with the ledger
? ⇒ Solves the “oracle” problem!
? So ledger links inventory sales to token transactions (if producers use matching tech.)
? ⇒ Enforcement of contracts!
? . . . while allowing buyers to remain private!
Tech platforms + digital ledgers = uncollateralized credit with buyer privacy
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15. Ledger Control and Information Economies of Scale
Other Arrangements Cannot Create Same Synergies
? Alternatives with independent ledgers (not bundled with any matching technology):
? Decentralized ledger updated by consensus (E.g. Ethereum, Solana.)
? Bank that maintains a hidden ledger.
? Ledger cannot distinguish between token exchanges from goods sales and other sales
? ⇒ Must tax everyone using the ledger to cover default losses!
? . . . Or disallow anonymous use of ledger!
Independent digital ledgers provide less uncollateralized credit than platform bundle
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16. Ledger Control and Information Economies of Scale
Questions
? Q. What is different about digital money? A. It requires a ledger.
? Q. Who has a comparative advantage in providing ledgers and credit?
? A. Tech platforms.
? . . . Because there are strong increasing returns to scale in information bundling.
But will tech platforms use their ledger control to increase market power?
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17. Ledger Control and Information Economies of Scale
Platform Competition at Two Levels (BP 2022)
? Want to understand whether platform faces meaningful competition.
Incumbent private platform potentially competes with:
? A public market place that uses public money (“currency competition”),
? An entrant private platform that offers same services (“contestable” markets).
? Platform designs the relative usefulness of tokens as a medium of exchange
? Platform designs the “interoperability” of their ledger:
? Exchange rate for moving tokens off their ledger to a new ledger
? Portability of information to other ledgers
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18. Ledger Control and Information Economies of Scale
Ledger Structures: Different Accounts
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19. Ledger Control and Information Economies of Scale
Ledger Structure: Credit
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 14 / 24

20. Ledger Control and Information Economies of Scale
Trade, Credit, Token: Competition with Public Market
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21. Ledger Control and Information Economies of Scale
Contestable Markets across Private Ledgers
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 14 / 24

22. Ledger Control and Information Economies of Scale
Platform Exploits Ledger to ↑ Market Power
? Restricts movement of tokens by charging token exchange fees
? Makes it costly for token-holders to move to entrant platform
? (Although needs to balance this with keeping the currency attractive.)
? Restricts portability of some information:
? Restricts portability of transaction histories so entrants have worse matching technology
? Promotes portability of contract information so contracts can be enforced even if entrant
takes over market
? Restrictions deter new platform entry and so allow incumbent to charge higher fees
Tech platforms + digital ledgers = higher markups! The DeFi fear!
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 15 / 24

23. Ledger Control and Information Economies of Scale
Interpretation: “Lock-in” and “Lock-out”.
? Different agents have different ledger exposures
? Buyers (with currency) have a “positive” claim on the ledger:
? Positive token holdings
? Positive “information” position (their transaction histories enable better matching)
(Like a “five-star” rating or a reputation.)
? Sellers (with inventory and loans) have a “negative” claim on the ledger:
? Negative token holdings
? Negative “information” position (their contract information enables enforcement)
? Platform restricts interoperability where agents have positive claim:
? Restricts movement of tokens and transaction histories to “lock-in” the buyers,
? Makes contract information portable to mitigate “lock-out” of sellers
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 16 / 24

24. Ledger Control and Information Economies of Scale
Questions
? Q. What is different about digital money? A. It requires a ledger.
? Q. Who has a comparative advantage in providing ledgers and credit? A. Tech
platforms.
? Q. Will large players exploit control of their ledgers to increase market power? A.
Yes.
Can (regulated) platform competition to get the efficient allocation?
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 17 / 24

25. Table of Contents
Digital Monies
Ledger Control and Information Economies of Scale
Open Banking
CBDC

26. Open Banking
Open Banking Regulation
? Traditional finance: intermediary controls the portability of information
? Open banking: users can veto the portability of information. In our model:
? Buyers control the portability of their transaction history (ιh
)
? Sellers control the portability of their loan contracts (ιc
)
? Open banking has been introduced/trialed in the UK and other countries.
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27. Open Banking
Open Banking Shuts Down Uncollateralized Credit
Perfect Comp Platform Control Open Banking
Information
Portability
- ιh = 0, ιc = 1 ιh = 1, ιc = 0
Loan fee Default rate ↑ ↓
Incumbent Value 0 > 0 < 0
? Buyers have positive information exposure ⇒ port their information
? Sellers have negative information exposure ⇒ do not port their information
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28. Open Banking
Uncollateralized Credit is Fragile
? Uncollateralized credit is required to initiate the supply chain.
? However, this makes incumbent platform vulnerable to an entrant platform because:
? The incumbent platform has committed to using payments on their ledger repay lenders.
? The uncommitted entrant platform can persuade borrowers to move by allowing default.
? ⇒ An incumbent platform needs to run a loss to deter entry.
? Incumbent platform only sets up ledger if they can compensate for this effect:
? E.g. Forcing the portability of contract information.
? E.g. Restricting the portability of transaction histories or tokens (later).
We should be careful about regulating “total” interoperability on platforms.
Payne Digital Tokens, Ledgers, and Regulation 15th September, 2022 20 / 24

29. Table of Contents
Digital Monies
Ledger Control and Information Economies of Scale
Open Banking
CBDC

30. CBDC
CBDC May Reduce Credit Provision
? Consider CBDC on a disconnected, non-programmable ledger.
? No CBDC: platform forces sellers to only accept their token on their platform:
? ⇒ Payments are made through the ledger.
? ⇒ Ledger contracts can be automatically enforced.
? With CBDC: agents organize side payments in CBDC to avoid ledger contracts:
? ⇒ CBDC “dollarizes” the private platform.
? ⇒ Platform cannot offer a ledger where buyers can offer uncollateralized loans to sellers.
? ⇒ Either credit reduced or market structure needs to change.
CBDC may break synergies
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31. CBDC
“Smart” CBDC: May Increase Credit Provision
? Consider legal tender CBDC with a programmable ledger.
? Agents write contracts on CBDC ledger, which are enforced everywhere if:
? CBDC becomes the dominant currency, and
? Other platforms/marketplaces provide information to the common ledger.
? Would we expect platforms to share information?
? Conditional on other platforms sharing, platform gets larger benefit from sharing.
? However, there are potential coordination problems,
? And platforms may prefer to intermediate payments,
CBDC bundled with a programmable ledger potentially enhances synergies.
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32. CBDC
Financial Ledgers as Public Utilities?
? Bundling information appears to look like a natural monopoly.
? Should ledgers be regulated like other natural monopolies?
? Should we offer a “smart” CBDC ledger as a public utility?
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33. CBDC
Conclusion
? Q. What is different about digital money?
? A. It requires a ledger. Need to think about strategic control of information.
? Q. Who has a comparative advantage in providing ledgers and credit?
? A. Tech platforms can exploit synergies to provide uncollaterized credit on open ledgers.
? Interpretation: platforms get benefit from creating their own settlement asset.
? Q. Will large players exploit control of their ledgers to increase market power?
? A. Yes. They will limit interoperability of ledgers to deter entry.
? Q. How should a regulator respond?
? A. Should preserve synergies from integrating digital ledgers other platform operations.
? “Smart” CBDC is worth further study.
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