Money Talks: Information and Seignorage

This paper analyses the consequences for monetary policy arising from private, centralised digital currencies (PCDC) such as Facebook's Diem. Firms introduce PCDC to generate seignorage revenues and information on consumers. In a benchmark model of imperfectly competing firms, information shapes the degree of currency competition: firms do not accept their competitors' currencies, which limits the seignorage base. Issuers of PCDC then optimally implement the Friedman rule to remove their seignorage income altogether. As a result, public currency is unable to compete unless the central bank follows suit, resulting in deflation. However, private currency market power breaks this benchmark: inflationary pressures arise if firms form currency consortia, but decision powers and seignorage claims are concentrated in the hands of one firm. The paper highlights scenarios in which information collection is inflationary, and offers an explanation for the Diem consortium's plan to issue stablecoins denominated in public currencies.