Is coming a fall of classical banking system?

Is coming a fall of classical banking system?

Common

A little bit of the history…

 

At first, we propose to plunge into history for a few millennia ago. It is not a secret that paper money appeared not so long time ago, but before that gold and silver were the main value and currency. This was not very convenient and safe for merchants since they had to constantly carry a huge bag of heavy and expensive metal with them. Particular risk arose during the moving from one city to another, because the robbers strove for profit from the wealth of travelers. This was not the 21st century, when you can send money anonymously using EPS or blockchain in a few clicks, then it was harder to protect your assets from thieves. Although, there are other methods of theft now and the question of cybersecurity is putting almost in the first place.

Jewelers owned large amount of gold, who kept it under reliable protection. They decided not to use their funds for payments for the purposing of convenience and began to write out a debt receipt, if presenting it anyone could take the amount of gold that belongs to ones. The currencies, which accustomed to us, were appear and had evolved significantly by the current moment.
However, let`s back to the jewelers, who eventually noticed a certain trend. First of all, no one takes most of the gold, it just lying on storage, since it is much more convenient to pay with these receipts. They are easy, comfortable, they can be folded several times and hidden. Secondly, reserves of gold are not just idle, they are replenished all the time. Thus, the crediting scheme was created.

Jewelers produce receipts a little more than gold exists. The merchant has the opportunity to take a receipt in debt, but he must return it with interest. The receipts became more and more and gold was less and less over the time. Gradually, humanity started to use the paper reckoning. However, there was an illusion at least that money was provided with gold, but in the middle of the 20th century, countries began to refusal the gold standard. For the first time, this decision was made by the United Kingdom in 1931, and in 1971, the United States was finally make an end on it.

 


 

How do modern banks make money out of air?

 

Let’s consider an example. Bob brings $ 100 to the bank X and puts them on a fixed deposit. Now Bob has information that he owns a certain amount of money in the bank and can take this money anytime, and bank X has the opportunity to make a profit using these funds by investing them. The management of a financial institution, in order not to get a loss in this transaction, gives $ 100 to another client at a percentage slightly higher than one that Bob will be paid. Another client buys the necessary item from Alice, who decides to put the same $ 100 in bank Y. A situation arises when Bob actually owns $ 100, but this money listed on the balance from two different banks – X and Y. Consequently, the process can last indefinitely and $ 100 turns into millions of non-existent factual funds that are only written on an electronic account. Partly because of such a generation of pseudo-money, humankind began to think about creating a mechanism that would guarantee the honest generation of new currency units (which later implemented Satoshi in Bitcoin).

However, everything is not as bad as it might seem at first glance. If everything functions according to the example above, then the financial system will collapse one day. Therefore, this process is controlled by the Central Bank. It is structure that monitors the circulation of money and controls the availability of required reserves, which must be present in any commercial bank.

However, even in such a transparent system there are pitfalls which mankind stably hits about every few decades. The European Central Bank (ECB) obliges banks to have 2 cents in reserve for every euro they owe to their customers. That is, in fact, customer funds are provided only by 2%. Therefore, people do not have real money in the bank, and the displayed balance is only the promise of the banker to return the funds if client.

 


 

On the one hand, banks are necessary for the world, since they solve several important problems, and without them, such a rapid development of humanity would hardly be possible. First, crediting stimulates the development of production processes, since technological progress is impossible without borrowed funds in the modern world. Secondly, banks significantly simplify the process of settlement. An ordinary worker has the ability to send money to a family in another country thanks to similar financial institutions. However, on the other hand, they can be compared with a cancerous tumor, which is constantly growing and ultimately killing. With the constant growth of pseudo-money supply, the balance of banks already exceeded global GDP in 1970. It means that about 50 years ago, there were more pseudo-money in circulation than they are necessary for an adequate functioning of the economy. Every year the printing press generates more and more numbers on the screen and bills that are not provided with anything.

 

Consequences of the banking system

 

There is no need to go too far for an example. Let’s take the mortgage crisis of 2007–2008, which many economists call the «scam of the century». In short, due to the negligence of the financial institutions and regulators that must watch them, the financial bubble of mortgage loans burst. Many people remember the consequences – the global financial crisis, millions of unemployed places, the collapse of stock markets, a bunch of bankrupt entrepreneurs, and so on. The Russian Federation, for example, still cannot come to the indicators of the pre-crisis period, although more than 10 years have passed.

In the «The Big Short» movie states that an increase in unemployment of 1% equals 40,000 deaths. It is terrible to imagine the statistics of that time. For states, for managers of banks, these are just numbers. The Central Bank rate rises for 0.25%, unemployment and mortality rises. But who cares?

If we turn to history, we can see that most of the global financial crises are connected precisely with banks and loans:

• 1857 – a crisis triggered by the bankruptcy of railway companies and the collapse of the stock market, against the background of which America’s banking system collapsed. Iron production reduced by 20%, cotton consumption by 27%. In the UK, the shipbuilding sector fell by 26%. Let`s imagine how many people lost their job.

• 1873 – The world crisis began due to a credit boom in Latin America, which was fed by England. At the same time, the real estate market in Germany and Austria was artificially overpriced. Subsequently, the stock market collapsed in Vienna, Zurich and Amsterdam. Then shares on the New York Stock Exchange plummeted, causing the banking sector to collapse.

• In 1914, seems that there is nothing to do with the banking system, since the crisis began because of the First World War and the total sale of foreign issuers’ securities by the governments of the USA, Great Britain, France and Germany. However, this step provoked a banking panic in the States, the UK and some other countries.

• 1929-1939 year. Experts note that the main cause of this crisis is the disproportion between the mass of goods and the amount of money. During this time, 40% of banks went bankrupt and depositors lost more than 2 billion US dollars. People hated bankers and the famous Bonnie and Clyde, who brazenly robbed banks, were admired by ordinary citizens.

• 1998–1999. Russian default. The government created a financial pyramid at the state level, which naturally failed. How did this happen? In May 1995, inflation in the country reached 200%. Authorities to finance the budget deficit issued government short-term bonds. By 1998, the inflation rate drops to 7.5%. The market for government short-term bonds (T-bills) works as follows: banks borrow from foreign countries, buy T-bills, and after a few months sell them and pay off debts. Thanks to such simple operations, it was possible to reach 50-140 percent per annum. The authorities of the Russian Federation are consistently releasing new T-bills in order to pay for old ones. Therefore, the financial pyramid that could not exist forever has arisen.

There are some more examples, but the essence comes down to the following conclusion: the banking system is firmly entrenched in the financial ecosystem of the whole world and in case of any problems, it is either the initiator, or the catalyst of the crisis, or suffers the most.

 


 

 

Other deficiencies of banks

 

They can say that banks are stability and guarantee of funds security, however, as we have found out, this is not true. Unsecure of assets is no longer guarantee a refund. In addition, we found out, that «the bubble bursts» and the banks go bankrupt one time per every several decades. Can we be sure that our bank will stand during the next financial crisis? Already these reasons are enough for realizing that they cannot be trusted, but there are other deficiencies of the banking system, especially if we compare it with the blockchain technology:

• High transfer fees

• The transfer duration. If you need to transfer money from Japan to the USA and it is Saturday now, then your payment will be sent no earlier than Monday. Moreover, if it is a holiday on Monday, then then your payment will be sent no earlier than Tuesday. That is, the delay could be 2-3 days. This is not very convenient.

• «Know Your Customer» Program. The statement that this lack will be controversial, because this program creates security. However, some people don`t want to report about their income to the authorities and want to remain anonymous.

• You don`t own your money. You are no longer their owner, if you putting money in the bank, just as you are not the owner of cryptocurrency, if you keep it on centralized exchanges.

• Any centralized structure is vulnerable and banks are just a striking example of centralization.

• Opacity. No one knows what is happening inside the bank. What translations and where it to go. In this regard, it is sometimes quite difficult to do business.

 

Why blockchain is better than the banking system?

 

As we have found out, centralized systems (such as banking) are insecure and vulnerable. The blockchain technology is devoid of these disadvantages due to decentralization. The main advantage of transferring and storing information using a distributed registry is that it cannot be falsified or changed. Any information, which was once recorded, remains forever on the blockchain without the ability to edit it. The technology is transparent and everyone has the opportunity to see who, where and how much sent the money. But it should be understood, that this is not only about the material world, the blockchain can be used in various sectors. For example, you can hold an election using a distributed registry. In this way, a completely fair vote can be achieved.

In addition, an important advantage – you own your money. If you put money in the bank, its management can «freeze» the account or suspend the transaction for no objective reason. This is impossible in the blockchain. If only you own the private key from the address, then no one else has the right to prohibit you from making or receiving transfers.

 


 

Another important advantage is the speed and cost of transactions. Sending money from the USA to another country costs approximately 2.5% -10%. This means, when transferring is $ 500, then the bank will take an average of $ 52.05, the money transfer operator $ 30.75, mail services will cost $ 34.05 and $ 16 will be taken by mobile operators. The transaction in the Bitcoin blockchain is currently costs about 10-20 cents and this means, that the sending $ 500 will need to pay a commission below 0.1%. And if you use blockchains with higher bandwidth, then it would be even less. For example, in April, 700,000 coins were sent from a large wallet in the Litecoin, which at that time was like $ 106 million. A commission of $ 0.40 was paid for this transfer and confirmation of the transfer lasted for 2.5 minutes.

Indirect, but in some extent, advantage is the fight against inflation. The authorities of many countries can print an unlimited amount of fiat currency to cover the budget deficit and thereby reduce its cost at any time. All users decide about emission of new coins in the decentralized blockchain. For example, in the first cryptocurrency network, a progressive decrease in the mining of new bitcoins is programmed. Thus, 99.9% of all coins will be mined by 2040 and the remaining 0.1% will be mined over the next 100 years. At the moment, inflation in the Bitcoin network is about 4%. After the next halving, which will occur next year, it will be about 2% , in 2024 it will be 1% and so on. The maximum emission is 21 million coins and if the community needs more, then the number of bitcoins can be increased only by changing the protocol. If the majority fails to do this, then this will not happen.

Anonymity is also attributed to the benefits. But, this is not at all a virtue, because it increases the likelihood of illegal actions, such as terrorism, selling drugs or trafficking in human beings. It is worth noting, that there is a so-called «pseudo-anonymity» in most blockchains, because the chain of blocks is fully open and available for viewing, although, there is no binding of an address to any person. Thus, if the user at least once somewhere shows his identity, then the chain will be able to track all his translations. Although, there are completely anonymous blockchains, that work as a mixer. For example, Monero, ZCash, Dash and others.

If sum up and compare the banking system and blockchain, then the following thesis will be like:

«The system is controlled by a narrow circle of people in banks and uses it to their advantage, in the case of the blockchain system it is controlled by all the entire community and any decisions are made jointly».

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A little bit of the history…

 

At first, we propose to plunge into history for a few millennia ago. It is not a secret that paper money appeared not so long time ago, but before that gold and silver were the main value and currency. This was not very convenient and safe for merchants since they had to constantly carry a huge bag of heavy and expensive metal with them. Particular risk arose during the moving from one city to another, because the robbers strove for profit from the wealth of travelers. This was not the 21st century, when you can send money anonymously using EPS or blockchain in a few clicks, then it was harder to protect your assets from thieves. Although, there are other methods of theft now and the question of cybersecurity is putting almost in the first place.

Jewelers owned large amount of gold, who kept it under reliable protection. They decided not to use their funds for payments for the purposing of convenience and began to write out a debt receipt, if presenting it anyone could take the amount of gold that belongs to ones. The currencies, which accustomed to us, were appear and had evolved significantly by the current moment.
However, let`s back to the jewelers, who eventually noticed a certain trend. First of all, no one takes most of the gold, it just lying on storage, since it is much more convenient to pay with these receipts. They are easy, comfortable, they can be folded several times and hidden. Secondly, reserves of gold are not just idle, they are replenished all the time. Thus, the crediting scheme was created.

Jewelers produce receipts a little more than gold exists. The merchant has the opportunity to take a receipt in debt, but he must return it with interest. The receipts became more and more and gold was less and less over the time. Gradually, humanity started to use the paper reckoning. However, there was an illusion at least that money was provided with gold, but in the middle of the 20th century, countries began to refusal the gold standard. For the first time, this decision was made by the United Kingdom in 1931, and in 1971, the United States was finally make an end on it.

 


 

How do modern banks make money out of air?

 

Let’s consider an example. Bob brings $ 100 to the bank X and puts them on a fixed deposit. Now Bob has information that he owns a certain amount of money in the bank and can take this money anytime, and bank X has the opportunity to make a profit using these funds by investing them. The management of a financial institution, in order not to get a loss in this transaction, gives $ 100 to another client at a percentage slightly higher than one that Bob will be paid. Another client buys the necessary item from Alice, who decides to put the same $ 100 in bank Y. A situation arises when Bob actually owns $ 100, but this money listed on the balance from two different banks – X and Y. Consequently, the process can last indefinitely and $ 100 turns into millions of non-existent factual funds that are only written on an electronic account. Partly because of such a generation of pseudo-money, humankind began to think about creating a mechanism that would guarantee the honest generation of new currency units (which later implemented Satoshi in Bitcoin).

However, everything is not as bad as it might seem at first glance. If everything functions according to the example above, then the financial system will collapse one day. Therefore, this process is controlled by the Central Bank. It is structure that monitors the circulation of money and controls the availability of required reserves, which must be present in any commercial bank.

However, even in such a transparent system there are pitfalls which mankind stably hits about every few decades. The European Central Bank (ECB) obliges banks to have 2 cents in reserve for every euro they owe to their customers. That is, in fact, customer funds are provided only by 2%. Therefore, people do not have real money in the bank, and the displayed balance is only the promise of the banker to return the funds if client.

 


 

On the one hand, banks are necessary for the world, since they solve several important problems, and without them, such a rapid development of humanity would hardly be possible. First, crediting stimulates the development of production processes, since technological progress is impossible without borrowed funds in the modern world. Secondly, banks significantly simplify the process of settlement. An ordinary worker has the ability to send money to a family in another country thanks to similar financial institutions. However, on the other hand, they can be compared with a cancerous tumor, which is constantly growing and ultimately killing. With the constant growth of pseudo-money supply, the balance of banks already exceeded global GDP in 1970. It means that about 50 years ago, there were more pseudo-money in circulation than they are necessary for an adequate functioning of the economy. Every year the printing press generates more and more numbers on the screen and bills that are not provided with anything.

 

Consequences of the banking system

 

There is no need to go too far for an example. Let’s take the mortgage crisis of 2007–2008, which many economists call the «scam of the century». In short, due to the negligence of the financial institutions and regulators that must watch them, the financial bubble of mortgage loans burst. Many people remember the consequences – the global financial crisis, millions of unemployed places, the collapse of stock markets, a bunch of bankrupt entrepreneurs, and so on. The Russian Federation, for example, still cannot come to the indicators of the pre-crisis period, although more than 10 years have passed.

In the «The Big Short» movie states that an increase in unemployment of 1% equals 40,000 deaths. It is terrible to imagine the statistics of that time. For states, for managers of banks, these are just numbers. The Central Bank rate rises for 0.25%, unemployment and mortality rises. But who cares?

If we turn to history, we can see that most of the global financial crises are connected precisely with banks and loans:

• 1857 – a crisis triggered by the bankruptcy of railway companies and the collapse of the stock market, against the background of which America’s banking system collapsed. Iron production reduced by 20%, cotton consumption by 27%. In the UK, the shipbuilding sector fell by 26%. Let`s imagine how many people lost their job.

• 1873 – The world crisis began due to a credit boom in Latin America, which was fed by England. At the same time, the real estate market in Germany and Austria was artificially overpriced. Subsequently, the stock market collapsed in Vienna, Zurich and Amsterdam. Then shares on the New York Stock Exchange plummeted, causing the banking sector to collapse.

• In 1914, seems that there is nothing to do with the banking system, since the crisis began because of the First World War and the total sale of foreign issuers’ securities by the governments of the USA, Great Britain, France and Germany. However, this step provoked a banking panic in the States, the UK and some other countries.

• 1929-1939 year. Experts note that the main cause of this crisis is the disproportion between the mass of goods and the amount of money. During this time, 40% of banks went bankrupt and depositors lost more than 2 billion US dollars. People hated bankers and the famous Bonnie and Clyde, who brazenly robbed banks, were admired by ordinary citizens.

• 1998–1999. Russian default. The government created a financial pyramid at the state level, which naturally failed. How did this happen? In May 1995, inflation in the country reached 200%. Authorities to finance the budget deficit issued government short-term bonds. By 1998, the inflation rate drops to 7.5%. The market for government short-term bonds (T-bills) works as follows: banks borrow from foreign countries, buy T-bills, and after a few months sell them and pay off debts. Thanks to such simple operations, it was possible to reach 50-140 percent per annum. The authorities of the Russian Federation are consistently releasing new T-bills in order to pay for old ones. Therefore, the financial pyramid that could not exist forever has arisen.

There are some more examples, but the essence comes down to the following conclusion: the banking system is firmly entrenched in the financial ecosystem of the whole world and in case of any problems, it is either the initiator, or the catalyst of the crisis, or suffers the most.

 


 

 

Other deficiencies of banks

 

They can say that banks are stability and guarantee of funds security, however, as we have found out, this is not true. Unsecure of assets is no longer guarantee a refund. In addition, we found out, that «the bubble bursts» and the banks go bankrupt one time per every several decades. Can we be sure that our bank will stand during the next financial crisis? Already these reasons are enough for realizing that they cannot be trusted, but there are other deficiencies of the banking system, especially if we compare it with the blockchain technology:

• High transfer fees

• The transfer duration. If you need to transfer money from Japan to the USA and it is Saturday now, then your payment will be sent no earlier than Monday. Moreover, if it is a holiday on Monday, then then your payment will be sent no earlier than Tuesday. That is, the delay could be 2-3 days. This is not very convenient.

• «Know Your Customer» Program. The statement that this lack will be controversial, because this program creates security. However, some people don`t want to report about their income to the authorities and want to remain anonymous.

• You don`t own your money. You are no longer their owner, if you putting money in the bank, just as you are not the owner of cryptocurrency, if you keep it on centralized exchanges.

• Any centralized structure is vulnerable and banks are just a striking example of centralization.

• Opacity. No one knows what is happening inside the bank. What translations and where it to go. In this regard, it is sometimes quite difficult to do business.

 

Why blockchain is better than the banking system?

 

As we have found out, centralized systems (such as banking) are insecure and vulnerable. The blockchain technology is devoid of these disadvantages due to decentralization. The main advantage of transferring and storing information using a distributed registry is that it cannot be falsified or changed. Any information, which was once recorded, remains forever on the blockchain without the ability to edit it. The technology is transparent and everyone has the opportunity to see who, where and how much sent the money. But it should be understood, that this is not only about the material world, the blockchain can be used in various sectors. For example, you can hold an election using a distributed registry. In this way, a completely fair vote can be achieved.

In addition, an important advantage – you own your money. If you put money in the bank, its management can «freeze» the account or suspend the transaction for no objective reason. This is impossible in the blockchain. If only you own the private key from the address, then no one else has the right to prohibit you from making or receiving transfers.

 


 

Another important advantage is the speed and cost of transactions. Sending money from the USA to another country costs approximately 2.5% -10%. This means, when transferring is $ 500, then the bank will take an average of $ 52.05, the money transfer operator $ 30.75, mail services will cost $ 34.05 and $ 16 will be taken by mobile operators. The transaction in the Bitcoin blockchain is currently costs about 10-20 cents and this means, that the sending $ 500 will need to pay a commission below 0.1%. And if you use blockchains with higher bandwidth, then it would be even less. For example, in April, 700,000 coins were sent from a large wallet in the Litecoin, which at that time was like $ 106 million. A commission of $ 0.40 was paid for this transfer and confirmation of the transfer lasted for 2.5 minutes.

Indirect, but in some extent, advantage is the fight against inflation. The authorities of many countries can print an unlimited amount of fiat currency to cover the budget deficit and thereby reduce its cost at any time. All users decide about emission of new coins in the decentralized blockchain. For example, in the first cryptocurrency network, a progressive decrease in the mining of new bitcoins is programmed. Thus, 99.9% of all coins will be mined by 2040 and the remaining 0.1% will be mined over the next 100 years. At the moment, inflation in the Bitcoin network is about 4%. After the next halving, which will occur next year, it will be about 2% , in 2024 it will be 1% and so on. The maximum emission is 21 million coins and if the community needs more, then the number of bitcoins can be increased only by changing the protocol. If the majority fails to do this, then this will not happen.

Anonymity is also attributed to the benefits. But, this is not at all a virtue, because it increases the likelihood of illegal actions, such as terrorism, selling drugs or trafficking in human beings. It is worth noting, that there is a so-called «pseudo-anonymity» in most blockchains, because the chain of blocks is fully open and available for viewing, although, there is no binding of an address to any person. Thus, if the user at least once somewhere shows his identity, then the chain will be able to track all his translations. Although, there are completely anonymous blockchains, that work as a mixer. For example, Monero, ZCash, Dash and others.

If sum up and compare the banking system and blockchain, then the following thesis will be like:

«The system is controlled by a narrow circle of people in banks and uses it to their advantage, in the case of the blockchain system it is controlled by all the entire community and any decisions are made jointly».

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