Free Banking with Tokenized Money

Hans Gersbach and Sebastian Zelzner

No 21785, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study free banking with tokenized money and ask whether competition among private issuers can deliver efficient allocations in rollover economies with and without financial frictions. Issuers finance long-term investments by issuing par-redeemable, bearer-like tokens that must be rolled over at an intermediate date. In frictionless environments, Bertrand competition can implement the first-best, but the rollover channel depends on the competitive margin: competition in yields supports active secondary trade, whereas competition in issuance discounts forces issuer-managed rollover. When some issuers secretly abscond with funds, revealed absconding triggers default and exit, concentrating savings on surviving issuers and lowering aggregate rollover needs. This funds-concentration effect shifts equilibrium refinancing rates and redistributes returns across cohorts, so even investors who enter only after misconduct is revealed bear part of its consequences. Finally, we provide a new perspective on how regulatory restrictions on token remuneration can create inefficiency, instability, and potentially market breakdown.

Keywords: Tokenized money; Private money; deposit tokens; Stablecoins; token remuneration; funds concentration (search for similar items in EconPapers)
JEL-codes: E4 E5 G1 G2 (search for similar items in EconPapers)
Date: 2026-07
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