The Liquidity Premium of Digital Payment Vehicle

Do digital payment technologies generate liquidity premia like cash and Treasury? We provide an estimate in the context of the world’s largest digital payment platform, Alipay. Our empirical strategy exploits the variation in the timing of the introduction of money market funds that users on this platform can hold and use for digital transactions. We find that, once a fund becomes eligible for these transactions, its size increases by 45 times on average. Through the lens of an equilibrium demand system model, we show that this size increase implies a liquidity premium of 0.8% per annum. This result provides a unique perspective for understanding and calibrating the liquidity premium of digital currencies. This paper was accepted by Will Cong, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01309 .