Free Banking with Tokenized Money

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.