Contagious Stablecoins?

Hugo van Buggenum, Hans Gersbach and Sebastian Zelzner

No 18521, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Can competing stablecoins produce efficient and stable outcomes? We study competition among stablecoins pegged to a stable currency. Stablecoins provide insurance against liquidity shocks, are backed by interest-bearing safe assets, and can be redeemed with the issuer or traded in a secondary market. If an issuer sticks to an appropriate investment and redemption rule, its stablecoin is invulnerable to runs since investors can still access secondary markets amid redemption restrictions. Since an issuer must pay interest on its stablecoin if other issuers also pay interest, competing interest-bearing stablecoins, however, are contagious and can render the economy inefficient and unstable. The efficient allocation is uniquely implemented when regulation prevents interest payments on stablecoins.

Keywords: Currency competition; Private money; Stablecoins; Free banking; digital money (search for similar items in EconPapers)
JEL-codes: E4 E5 G1 G2 (search for similar items in EconPapers)
Date: 2023-10
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Working Paper: Contagious stablecoins? (2024)
Working Paper: Contagious Stablecoins (2023)
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