From Commodity to Fiat and Now to Crypto: What Does History Tell Us?
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.
Revision of a paper prepared for the Digital Currency Economics and Policy Workshop of National University of Singapore, November 2018. For comments I am grateful to Nadar Al-Jaji, Randall Morck and David Wen. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.