Giovanni Dell’Ariccia (IMF)

Digital Currency, Data Monopoly and Extractive Adverse Selection in Payments and Lending

joint with Itai Agur and Anil Ari

Abstract. The issuance of digital currencies by BigTechs raises the specter of unprecedented data monopolies. This paper examines the difference between the privately and socially optimal extent of data commercialization in a random-state model where a digital currency competes for users who differ in the degree to which they value privacy and have incentives to disclose hidden qualities. Households with better quality and lower privacy preferences opt for increased disclosure, and in doing so worsen the borrowing conditions of other households, due to a Lemons’ Market effect. Socially optimal regulation trades of the benefit of limiting intrusiveness against the value of type disclosure in enabling financial access.