The advent of cryptocurrencies such as Bitcoin, Ethereum, Litecoin and others has sparked interest in governments, financial institutions and the public in general in privately issued money. Research work in this space mostly describes the working of the digital currencies and the regulatory aspects. However, a recent paper co-authored by Jesús Fernández-Villaverde of the University of Pennsylvania and Daniel Sanches, researcher at Federal Reserve Bank of Philadelphia, seeks to answer the question: “Can Currency Competition Work?”
“Can competition among privately issued fiat currencies such as Bitcoin or Ethereum work? Only sometimes. To show this, we build a model of competition among privately issued fiat currencies”, the report says.
Among other things, the research finds that there exists an equilibrium in which price stability is consistent with competing private monies.
The paper also explains how the issuing of private currency is logically separated from banking. Banks have central authority in the network of payments, which makes it easy for them to introduce currency in circulation. It argues that internet has broken the ‘logistical’ barrier, as bitcoins are issued through a process that is independent of the banking system.
It says that while a system of competing currencies does not necessarily imply efficiency and stability, the research identifies the characteristics of an efficient and stable private monetary arrangement under free entry (given that the framework is sufficiently flexible to consider relevant extensions of the baseline model).
The report concluded saying: “Many topics, including the analysis of the different degrees of moneyness of private currencies (including interest-bearing assets and redeemable instruments), the role of positive transaction costs among different currencies, the entry and exit of entrepreneurs, the possibility of market power by currency issuers, or the consequences of the lack of enforce-ability of contracts are some of the avenues for future research that we hope to tackle shortly”.
