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.
- This paper analyzes free banking with tokenized money, exploring whether private issuer competition can achieve efficient allocations in economies with financial frictions.
- It examines how issuer misconduct (absconding) leads to fund concentration, impacting refinancing rates and redistributing returns across investor cohorts.
- The study suggests that regulatory restrictions on token remuneration can foster inefficiency, instability, and potential market breakdown.
Topics: Asset types, Legal regulatory, Scalability, Stablecoins digital cash, Securities law classification, Market depth liquidity
Tags: #tokenizedmoney #freebanking #privateissuers #rollovereconomies #financialfrictions #bertrandcompetition #secondarytrade #absconding #regulatoryrestrictions #marketbreakdown
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