A new research paper co-authored by an economics advisor at the Federal Reserve Bank of Philadelphia explores whether private currencies, such as digital currencies like bitcoin, can compete with government-issued alternatives.
“Can competition among privately issued fiat currencies such as Bitcoin or Ethereum work?” the paper, published on 3rd April, asks. “Only sometimes. To show this, we build a model of competition among privately issued fiat currencies.”
The paper, co-authored by Jesús Fernández-Villaverde of the University of Pennsylvania and Philadelphia Fed researcher Daniel Sanches, seeks to unpack how private forms of money, including digital currencies, interact with one another in terms of price stability.
Among the notable arguments is that the rise of the Internet has resulted in an environment in which private monies like bitcoin can competitively emerge.
“Our model highlights how the issuing of a private currency is logically separated from banking. Both tasks were historically linked for logistical reasons: banks had a central location in the network of payments that made it easy for them to introduce currency in circulation,” the paper states, adding:
“We will argue that the Internet has broken the logistical barrier.”