Money Creation for Crypto Space: Stablecoins or Central Bank Digital Currencies?

Stablecoins are the current go-to digital money to settle transactions on the blockchain. We explore the implications of introducing competing tokenized public digital monies (i.e., tokenized central bank digital currencies (CBDCs)). When they pay a moderate interest rate and guarantee users’ anonymity, tokenized CBDCs crowd out stablecoins. However, when they pay a high interest rate and have low anonymity features, stablecoin issuers could use tokenized CBDCs as collateral, promoting the creation of stablecoins. We identify conditions under which introducing a CBDC to compete with stablecoins in the crypto sector would be socially optimal. This paper was accepted by Will Cong for the Virtual Special Issue on Digital Finance. Funding: Support from Swiss National Science Foundation (SNSF) [Grant 100018 219835].