From Commodity to Fiat and Now to Crypto: What Does History Tell Us?

Abstract

Over time, there has been a tendency for political jurisdictions and residents to converge on a single currency. Monopoly over seigniorage is a source of political power and a valuable lifeline when sovereignty is threatened. Moreover a uniform currency, insofar as it is free of counterparty and liquidity risk, facilitates economic activity. But will digital currencies now reverse this trend toward uniformity, given the apparent ease with which they can be created? The information sensitivity of those units, evident in the fact that they trade at varying prices, suggests that they do not yet provide the core functions of money. So-called stable coins are intended to bridge this gap, but whether they can be successfully scaled up and maintain their stability is doubtful. The one unit that can clearly meet these challenges is central bank digital currency. But there would be both costs and benefits of moving in this direction.

The Digitalization of Money

“…Indeed, if there were a broad loss of confidence in the banking system, people would have nowhere to run. The general availability of public currency disciplines the banking sector as a whole.19 SeeEichengreen (2019) for an extensive discussion of the history of private money and the introduction of fiat cryptocurrencies and stable coins. Fernández-Villaverde and Sanches (2019) study competition among privately issued currencies in a workhorse macroeconomic model.20 See Landau and Genais (2019) for an extensive discussion of this and related issues.…”

Are the stabilities of stablecoins connected?

“…We find occasional periods in which the market prices of stablecoins substantially deviate from their nominal values that question the level of the self-acclaimed stability feature of the stablecoins in those periods. A Central Bank Digital Currency that is issued directly by the central banks could potentially eliminate those issues and provide a stable medium of exchange for settling transactions as discussed by Eichengreen (2019) and Hairudin et al (2020). Our results also show that algorithmic stablecoins perform worse compared to privately issued stablecoins.…”

Macroeconomics Challenges and Resilience of Emerging Market Economies

“…22 The analysis below expends and update the arguments outlined in Aizenman (2019) VoxEu column. See also overview of these issues in Eichengreen (2018), Roubini (2018), Cukierman (2019.…”