Global Demand for Basket-Backed Stablecoins

36 Pages Posted: 23 Jun 2020

See all articles by Garth Baughman

Garth Baughman

Board of Governors of the Federal Reserve System

Jean Flemming

Board of Governors of the Federal Reserve System

Date Written: June, 2020

Abstract

We develop a model where persistent trade shocks create demand for a basket-backed stablecoin, such as Mark Carney's "synthetic hegemonic currency" or Facebook's recent proposal for Libra. In numerical simulations, we find four main results. First, because of general equilibrium effects of the basket currency on the volatility of currency values, overall demand for that currency is small. Second, despite scant holdings of the basket, its global reach may contribute to substantial increases in welfare if the basket is widely accepted, allowing it to complement holdings of sovereign currencies. Third, we calculate the welfare maximizing composition of the basket, finding that optimal weights depend on the pattern of international acceptance, but that basket composition does not significantly affect welfare. Fourth, despite potential welfare improvements, low demand for the basket currency from buyers limits sellers' incentives to invest in accepting it, suggesting that fears of a so-called global stablecoin replacing domestic sovereign currencies may be overstated.

Keywords: Digital currencies, International monetary system, Money demand, Stablecoins

Suggested Citation

Baughman, Garth and Flemming, Jean, Global Demand for Basket-Backed Stablecoins (June, 2020). FEDS Working Paper No. 2020-048, Available at SSRN: https://ssrn.com/abstract=3633960 or http://dx.doi.org/10.17016/FEDS.2020.048

Garth Baughman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jean Flemming

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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