The Biggest Banking Revolution Ever is Here, and we Look Away
Since their inception banks offered two categories of services: a place to put money, and a means to grow money. Banks thrived because there was no viable alternative to their offer to safeguard our cash holdings. This has changed. In our new neighborhood, cyberspace, our phone is safer than the bank.
Cryptography and software beats vaults and hardware. To survive banks need to focus on their money-use services: identify credit-worthy borrowers and share the profit with their depositors. This simple reality is camouflaged in clouds of financial lingo and techno babble because banks are not bold enough to face their future.
It is really revolutionary, this little shiny article in the palm of your hands challenges deeply excavated cellars, thick steel walls, and parading armed guards. Not only is your money safer in your phone than in your bank, it is more readily available than in the bank. This is so revolutionary that traders and bankers alike are not internalizing this news. Representing BitMint I approach bankers offering to show them how our level-paying field digital coin works. So many of them are simply not interested. Now the PBOC - the parallel to the Federal Reserve in China is very interested in BitMint technology, and the Bank of Shanghai implemented and stress-tested it. Alas, the BitMint solution is one of many, and may not be the best, it simply represents a shocking reality: banks are no longer indispensable as the only option to safeguard cash and liquidity in large quantities. It is over, fellows. As soon as the fog rises, people will pull their funds out of their liquid bank accounts. There will be no rationale for keeping it there. And the coming fast payment technology would not help.
Once banks realize that, they will also realize that in a roundabout way this is good for business. Good for the core business, the core expertise of banks. Apart from building bombastic vaults, what are banks good for? A good bank has the skills, the expertise, the know-how to identify credit worthy borrowers, and lend them money payable with a profitable interest. Banks say to their depositors: “You give us your money, we will use our expertise to land it to solid borrowers which will not default, rather pay it back with interest, and then you ,the depositor, and us, the banks will share this profit.” Sounds like a good deal. Only that today the banks use liquid short term accounts to fund long terms loans, counting on the statistical premise that only a small fraction of these cashing-out ready accounts are actually being cashed out at any moment. This statistical expectation melts away when even a single bank somewhere far is collapsing, threatening a chain reaction. To prevent one we have the FDIC, which is too little too late. This threat of systemic collapse is hinged completely on the imbalance between short term deposits and long term loans. But in the new banking reality, depositors will not use checking accounts or short-term saving accounts -- they will use their phones for that handy money. Depositors will go to the bank to place there money to be tied up in long term promised interest which the bank will then safely loan to long term borrowers, then share the profit with the depositors. Bingo! -- No need for FDIC, no fear of a run on the bank because the imbalance: short-term v long-term money disappears.
Banks will be making a living on their competence to spot good borrowers, and compete with each other like all other industries. Meanwhile the public will store its liquid cash on their computing devices, trusting cryptography rather than the alertness of bank regulators.
And a word about the cryptography. It's not bitcoin, and it is not the cryptography banks use for wire transfer. This cryptography is broken, or soon will be. It is inherently vulnerable to smarter mathematicians and to faster computers. Cyber money as with BitMint and other technologies is hinged on a resource that too is under appreciated for its dramatic contribution: non-algorithmic randomness. It is immunized against big government and it stands against big crime. See details in "The Prospect of a New Cryptography: Extensive use of non-algorithmic randomness competes with mathematical complexity" (https://eprint.iacr.org/2023/383).
It is simple but bankers are so reluctant to face it. There are very few runs on the banks throughout history, not because their business model was sound (the disparity between short-term deposits and long-term loans is an inherent risk), but because depositors did not have mattresses big enough to keep their money in. Reluctant, and fearful they returned to the banks to buy money-housing services. Technology changed this. “Thanks, but no thanks, banks! We don't need you to store our money, we only need you to help us generate interest from our money.”
This notion of non-account based money holding is technology driven and cannot be stopped by Congress, neither by regulators, nor by central banks, although God knows they all try. Bitcoin rose to fame in the European financial crisis of 2010 when scared depositors desperately searched for a safe place to keep their liquidity in. Alas, Bitcoin is “air based” and is vulnerable to quantum computers, so different solutions are needed, like BitMint. Bitcoin created an intellectual thrill when it ushered in “unanchored money” that soared on the expectations that it will continue to soar. BitMint and other solutions are “anchored money”: you buy your digital coins with non-digital assets that remain redeemable 24/7. The BitMint mint makes money by charging for the benefit of keeping your assets liquid, private and digital. The fees you now pay the bank, you will pay to the mint that will turn your phone into your wallet.
Banks and financial influencers are so uneasy about this simple premise here that it is fully expected that this post will be treated as if it has not been published. Except in China...
About the author: unlike Secretary Yellen or Chairman Powell, Gideon Samid although he authored financial books published by Elsevier International, is not a finance professor. He is in fact an innovation practitioner, the designer of the generic innovation engine, which he helps others use and helps himself too (resulting in nearly 40 granted US patents). He is the designer of BitMint: the LeVeL-paying field digital money solution, and the developer of randomness-rich, unbreakable cryptography, among other hardware and software inventions.