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Contagious Stablecoins?

Author

Listed:
  • van Buggenum, Hugo
  • Gersbach, Hans
  • Zelzner, Sebastian

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.

Suggested Citation

  • van Buggenum, Hugo & Gersbach, Hans & Zelzner, Sebastian, 2023. "Contagious Stablecoins?," CEPR Discussion Papers 18521, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:18521
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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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