Abstract
We construct a model where a basket-backed stablecoin – a currency backed by and pegged to a combination of sovereign currencies, such as Mark Carney's “synthetic hegemonic currency” or Facebook's proposal for Libra – is demanded for transaction purposes. In the model, demand for the basket derives from trade shocks which affect demand for the underlying sovereign currencies. Despite providing a justification for the basket, our model, in numerical simulations, predicts that overall demand for the basket will be low. This derives from a general-equilibrium effect of the basket currency: Demand for the basket creates pass-through demand for the underlying currencies that back it. This pass-through demand stabilizes the value of the currency for which the basket was meant to substitute, limiting demand for the basket. We calculate that this low demand from buyers would likely limit adoption by sellers. Further, we show that agents in the economy disagree about the optimal basket composition, but its welfare impacts are small.
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