The End of Banks

Why are banks useful:

  • Security: They hold large sums of assets on depositors’ behalf.
  • Value Transfer: They help move assets between entities.
  • Credit: Through letters of credit, and loans, banks grease the wheels of commerce and help it grow as well.

Banks have performed these three functions for thousands of years. However, banks cannot operate in a vacuum. In order to perform their duties, they need to protect wealth and enforce contracts. Governments provide these services to banks.

Because governments have a license to harm or kill its citizens if they rob banks or do not follow court orders, they can safeguard banks’ assets and profitability.

In return, governments use banks to monitor and control the flow of money through an economy. They also use banks as tax and money creation agents. Governments use the threat of nationalisation and expropriation of assets to force banks to follow their diktats.

While banks and governments need one another, the relationship is not always harmonious. Banks seeking profit, over-extend credit, and routinely fail. Governments must then force bank recapitalisation costs onto its citizens. This is never popular.

Governments spend more than they can collect in taxes. In the extreme, this causes currency collapse and hyperinflation. When this happens, governments nationalise banks and force them to lend to the government.

Up until now, governments needed banks to issue currency, track, and lend it. The advent of central banking did not change this. Central banks merely attempt to control a cabal of self-interested bankers with varying degrees of success. Governments crave unfettered control. While they have a license to kill, they still needed banks to control the supply of money.

Money is entering the digital age. Governments globally are attempting to rid the world of physical cash. Physical cash cannot be tracked by a central authority. Using cash, the population can conduct economic activity outside of the watchful eye of Sauron.

The Future: eFiat

Digital ledgers, blockchains and MySQL databases when applied to money can completely centralise its functions. Now that the world is connected via internet enabled devices, money can become purely digital.

If money is purely digital, why do governments need banks to safeguard, transfer, and lend it? With a central database, the central bank can completely control the money supply.

The PBOC intends to issue an electronic RMB. One day, out of the blue, the PBOC will declare all physical RMB notes invalid after a certain date. In order to retain your wealth, you must tender your notes to a government office or bank. Then eRMB will be transferred into your government issued online wallet.

Setting up an eRMB wallet will be very simple. Log onto a web page, provide your national ID card, and a mobile phone number. You will now have an eRMB wallet bound to these personal details. If the government really is on the ball, they will also provide a mobile app.

Using QR codes, instant messaging apps, or unique character strings, you can send anyone or any business eRMB instantly. It will be just like WeChat or Apple pay.

The central database will be maintained by the PBOC. They can now see with complete clarity all economic activity that happens inside of China. It will be almost impossible to engage in unlicensed economic activity. Any non-compliant merchant or service provider will not be able to take payment.

If the PBOC wants to increase economic activity through lending, they no longer need to trust its member banks to follow Beijing’s instructions. They can directly dispense credit to those they deem worthy.

Through eRMB, the PBOC interacts directly with citizens and businesses obviating the need for private or even state-owned banks.

Will Cryptocurrencies Survive?

In a world where all financial transactions conducted in eRMB are completely transparent, there is still a role for non-government controlled cryptocurrencies. Just like the exchange of physical cash or bank credit for gold is currently allowed, Bitcoin will be able to be purchased with eFiat money. These transactions will be heavily regulated and taxed, but they will still be possible.

Merchants who wish to supply unlicensed goods and services will accept Bitcoin and other similar currencies. As we move towards a purely digital monetary regime, it will foster the creation of a natural cryptocurrency economy.

The other benefit of the move towards a cashless society, is that people will be more comfortable accessing their wealth via an internet connected device. The younger generations will mature without the concept of tactile money. They can conceptualise value in a purely digital form.

We grew up with physical representations of money. It is a mental stretch to conceive of pure digital money. That is why adoption of Bitcoin and other cryptocurrencies will remain tough for older generations.

You Got India’ed

The conversion of physical into digital money will not be a smooth process. Look at the chaos caused by Prime Minister of India Modi’s cash grab. Overnight, 86% of currency in circulation became worth less than one-ply toilet paper.

eFiat is coming to a country near you. Before exorbitant taxes and regulations are heaped upon the conversion of eFiat into Bitcoin, you should be diversifying your wealth into various forms of cryptocurrencies. Gold in India now trades close to $3,000 per oz (almost 2.5x its price outside of India), if you can buy it at all. Remember, those who sell first, sell best.