Working Paper: CEPR ID: DP18521
Authors: Hugo van Buggenum; Hans Gersbach; Sebastian Zelzner
Abstract: We study competition between stablecoins pegged to a stable currency. Stablecoins are issued by coalescing investors and backed by long-term assets. They can either be redeemed with the issuer or traded in a secondary market. When an issuer limits redemption and sticks to an investment rule, its stablecoin is stable in an idiosyncratic sense—it is invulnerable to runs and always trades at the pegged price. Competition between issuers, however, entails a coordination problem in which an issuer must pay interest on its stablecoin if other issuers pay interest as well. As a consequence, the economy can be inefficient and unstable. The efficient allocation can be implemented uniquely when regulation prevents the issuance of interest-bearing stablecoins, as these can be contagious.
Keywords: stablecoins; currency competition; free banking; private money; digital money
JEL Codes: E4; E5; G1; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investment strategy (G11) | stability of stablecoin (E42) |
| issuer competition (L13) | stability of stablecoins (E42) |
| regulatory frameworks (G38) | market stability (D53) |
| regulation preventing interest payments (G28) | efficient allocation (D61) |