Earlier this week, Dr. Nouriel Roubini, one of the most well-known and harshest critics of blockchain technology and cryptocurrencies, wrote that central bank digital currencies (DBDCs), which the International Monetary Fund (IMF) chief, Christine Lagarde, had talked about last week, would bring the downfall of cryptocurrencies.
Dr. Roubini, who teaches economics at New York University (NYU) Stern School of Business, was writing about CBDCs in an article for the Guardian, and he was arguing that central banks should "issue their own digital currencies" to "replace a crisis-prone banking system" and "shut out cryptocurrencies."
Cash Usage Going Down in Many Places
With the growing use of debit/credit cards (as well as Apple Pay and Google Pay, which are connected to them) and digital payment services such as PayPal, Venmo, and Square's Cash App, as well as equivalents outside the U.S. (such as "Alipay and WeChat in China", M-Pesa in Kenya", and "Paytm in India"), there is less and less need for consumers to use cash, and in fact, in places such as Sweden, cash usage is quite rare, even when purchasing small value items such as magazines.
As Roubini correctly points out, these solutions are "still connected to traditional banks," and none of them "rely on cryptocurrencies or blockchain." But the following assertion is less easy to swallow:
"Likewise, if CBDCs are ever issued, they will have nothing to do with these over-hyped blockchain technologies."
CBDCs Would Eliminate All Cryptocurrencies
Roubini says that policymakers considering the idea of CBDCs does not mean that they have accepted the idea that it is necessary for central banks to use the blockchain or any kind of cryptocurrency. Rather, he claims that "CBDCs would likely replace all private digital payment systems, regardless of whether they are connected to traditional bank accounts or cryptocurrencies." In case you are wondering why Roubini thinks so, he says that it is because
- central banks already have "a centralised permissioned private non-distributed ledger that allows for payments and transactions to be facilitated safely and seamlessly";
- by allowing individuals, corporations, and non-bank financial institutions to "make transactions through the central bank," CBDCs would be able to alleviate "the need for cash, traditional bank accounts, and even digital payment services;"
- CBDCs would "immediately displace cryptocurrencies" since the latter are not "scalable, cheap, secure, or actually decentralised;"
- although some people may wish to use them in order to carry out anonymous transactions, Bitcoin is not that "anonymous", and authorities are likely to "soon crack down on" privacy-focused cryptocurrencies that offer "complete privancy."
It is hard to argue with parts 1, 2, and 4 of his reasoning. Part 3, however, is more contentious since there are both existing and upcoming cryptocurrencies that seem scalable, cheap, and secure, and mostly decentralized.
Rather unsurprisingly given the way he has expressed his contempt for cryptocurrencies (especially Bitcoin) in the past, Roubini seems excited by the idea of CBDCs eliminating "worthless cryptocurrencies."
CBDCs Would Drive Financial Inclusion
Financial inclusion could be defined as "the pursuit of making financial services accessible at affordable costs to all individuals and businesses, irrespective of net worth and size, respectively."
Here, Roubini is agrees with Coinbase UK CEO, Zeeshan Feroz, who said on 14 November 2018, as covered by CryptoGlobe, that CBDCs can help drive financial inclusion:
"Moreover, by transferring payments from private to central banks, a CBDC-based system would be a boon for financial inclusion. Millions of unbanked people would have access to a near-free, efficient payment system through their cell phones."
What Would Happen to Retail Banks If CBDCs Take Off?
Roubini acknowledges that the "main problem with CBDCs is that they would disrupt the current fractional-reserve system through which commercial banks create money by lending out more than they hold in liquid deposits," and that "f 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."
He says that this means that "the fractional-reserve banking system would be replaced by a narrow-banking system administered mostly by the central bank," which would be a good thing and would allow central banks to 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."
He concludes by saying that although some challenging issues would need to be addressed, we should still be open to the idea of CBDCs since eventually "CBDC-based narrow banking and loanable-funds intermediaries could ensure a better and more stable financial system."
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