Contagious Stablecoins?

Center for Financial Studies Working Paper No. 717, 2024.

62 Pages Posted: 20 Mar 2024

See all articles by Hugo van Buggenum

Hugo van Buggenum

ETH Zürich; Tilburg University - Tilburg University School of Economics and Management

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Sebastian Zelzner

ETH Zürich - KOF Swiss Economic Institute

Date Written: January 31, 2024

Abstract

Can competing stablecoins produce efficient and stable outcomes? We study competition among stablecoins pegged to a stable currency. They 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 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: Stablecoins, currency competition, free banking, private money, digital money

JEL Classification: E4, E5, G1, G2

Suggested Citation

van Buggenum, Hugo and Gersbach, Hans and Zelzner, Sebastian, Contagious Stablecoins? (January 31, 2024). Center for Financial Studies Working Paper No. 717, 2024., Available at SSRN: https://ssrn.com/abstract=4746634 or http://dx.doi.org/10.2139/ssrn.4746634

Hugo Van Buggenum

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sebastian Zelzner

ETH Zürich - KOF Swiss Economic Institute

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