A Staff Working Paper published by Canada’s central bank last week concluded that a central bank digital currency (CBDC) could address the issues arising from the digitisation of our money and banking system, as argued in Positive Money’s Digital Cash proposal.
The paper explores scenarios in which central bank-issued fiat money is eclipsed by privately issued e-money, echoing concerns Positive Money has voiced about private interests gaining a monopoly over the monetary system:
“Results show that declining fiat money usage can hurt social welfare because the e-money issuer has an incentive to maximize its own profit instead of social welfare, and declining fiat money usage gives more monopoly power to the e-money issuer.”
As the researchers acknowledge, this is one of the risks of a cashless society, which a CBDC could mitigate: “as the economy becomes cashless, it is optimal for the central bank to tolerate more inflation for higher welfare”, while “The CBDC simplifies the monetary policy and improves the welfare, especially when the economy is close to cashless”
In other words, a CBDC would allow the central bank to increase the money supply, which would be at risk of shrinking in an economy dominated by privately-issued e-money, with catastrophic consequences for employment, wages and social welfare. A CBDC would make it easier to stimulate the real economy through policies such as ‘QE for People‘, rather than having to rely on private banks to use their money creation powers in the public interest (which they have been shown to be incapable of).
The Bank of Canada’s Working Paper is the latest in a stream of research from experts at monetary authorities, such as the IMF, the Bank of England and Sweden’s Riksbank, giving support for Positive Money’s Digital Cash proposals, which we hope will help realise the vision put forward in our Sovereign Money research.