As we explored last week, our proposal for Digital Cash in the form of a central bank digital currency (CBDC) is rapidly gaining the attention of some of the world’s most influential policymakers.
Now this week one of the biggest names in contemporary economics, Nouriel Roubini, has written an article in which he expresses support for a CBDC as a means of positively transforming the financial system.
Positive Money believes that a CBDC would address the problems associated with a banking system where private banks are free to create money with little constraint, often described as ‘fractional-reserve banking’. As Roubini explains, CBDCs
“would disrupt the current fractional-reserve system through which commercial banks create money by lending out more than they hold in liquid deposits. Banks need deposits in order to make loans and investment decisions. If all private bank deposits were to be moved into CBDCs, then traditional banks would need to become “loanable funds intermediaries,” borrowing long-term funds to finance long-term loans such as mortgages.
In other words, the fractional-reserve banking system would be replaced by a narrow-banking system administered mostly by the central bank. That would amount to a financial revolution – and one that would yield many benefits. Central banks would be in a much better position to control credit bubbles, stop bank runs, prevent maturity mismatches, and regulate risky credit/lending decisions by private banks.”
A CBDC can therefore be thought of as a stepping stone towards the ideal of a Sovereign Money System originally proposed by Positive Money. It would limit the power of private banks to create money to pour into asset speculation and enable the creation of Sovereign Money in its place.
As Roubini concludes:
“In due time, CBDC-based narrow banking and loanable-funds intermediaries could ensure a better and more stable financial system. If the alternatives are a crisis-prone fractional-reserve system and a crypto-dystopia, then we should remain open to the idea.”