The current banking system and fiat currencies are obsolete. They are unfit to support the new economy. Banks are intermediaries and, as such, they can hinder or delay the free flow of businesses. Banks are expensive, especially for the poor. People lose money at banks, due to outrageous fees. People are fearful of putting their money in banks in countries such as Argentina, Cyprus, and Greece. History has proven those people right. And, in the U.S., what would have happened if taxpayers had not bailed out the banks and other big financial institutions during the 2008 financial crisis? Do you remember the popular maxim “Too big to fail”? The good news is that Bitcoin and its underlying blockchain technology promise to radically improve this situation. However, as you might have guessed, a powerful banker has stated that Bitcoin must be stopped.
The Banking System Is Antiquated
The Money Changers, Marinus van Reymerswaele
The combination of an archaic institution such as banking and a three-thousand-year-old monetary system is not compatible with the borderless, digital, democratic, and fast-moving new economy.
Banking has existed since 2000 BC when merchants loaned grain to farmers. Later on, in ancient Greece and Rome, lenders based in temples started accepting deposits and making loans. Banking further expanded and became more sophisticated during the Renaissance. Rich families founded banks in Florence, Venice, and Genoa, from where banking spread all over the world.
In the U.S., before its independence, each of the 13 original states had its own bank and currency. Then, in 1791, Congress created the first U.S. bank. At that time, many opposed the creation of this bank, claiming that the Constitution did not give Congress the power to establish a central bank.
U.S. Federal Reserve Board Room 1940
Banking has suffered many upheavals throughout history, the latest being the 2008-2009 financial crisis. When markets collapsed, millions lost their homes, and millions lost their jobs, causing economic distress all over the world. During this crisis, big banks got rid of their competition and increased their wealth by swallowing smaller banks. For example, in 2008, JPMorgan Chase bought Washington Mutual. In this regard, according to the Wall Street Journal, JP Morgan Chase recently “won a legal battle in its effort to avoid billions of dollars in potential liabilities from its purchase of Washington Mutual’s banking operations during the financial crisis.”
Similarly, during the same period, JP Morgan Chase bought the fifth-largest investment bank, Bear Stearns. For this transaction, Reuters reported early this year, “JPMorgan Chase has agreed in principle to settle class action litigation arising from Bear Stearns’ sale of $17.58 billion of mortgage securities that proved defective during the recent U.S. housing and financial crises.”
Additional examples of banking crises abound all over the world. In Argentina, one notable crisis is known as El Corralito (bank freeze). This happened in 2001, when the then-Minister of Economy, Domingo Cavallo, decreed the freezing of bank accounts, to contain a run on the banks. As a result, millions of Argentinians were plunged into poverty. More recently, banking crises have occurred in Iceland, Greece, and Cyprus.
Today, banks have not changed much. Banking is cumbersome and banks are painfully slow to serve you, but fast to take your money. In effect, “The only banking activity that is digital is taking money out of clients’ accounts, which is performed in real-time with 100% consistency,” according to an article published by Bank Tech. Furthermore, the same article states that banks must undergo a radical transformation and embrace digital systems. However, this transition is hampered due to the proliferation of IT legacy systems.
Banking is Expensive
Jamie Dimon, CEO of JPMorgan Chase
Banking services are more expensive for the poor. If your balance falls below a certain amount, the bank punishes you with a monthly fee. My bank, for example, charges 12 USD whenever my checking account is below the minimum daily balance, which the bank has arbitrarily set at USD 1,500. Of course, there are no delays when the bank takes that money from your account. It happens instantaneously.
“It’s Expensive to be Poor,” is the title of an article published by The Economist, last September. The article describes why low-income Americans often have to pay more. “Life is expensive for America’s poor, with financial services the primary culprit, something that also afflicts migrants sending money home,” says The Economist.
Indeed, there are so many fees that it is difficult to know how much the bank is really charging you. Some of the known fees include foreign transaction fees, returned deposit fees, early account closure fees, returned item fees, overdraft protection transfer fees, paper statement fees, returned mail fees, and human teller fees. You can find a list of the fees that Chase Bank charges here. Bank of America’s list of fees is here.
Bitcoin and the Blockchain Can Help Banks
Bitcoin and the blockchain behind it can significantly lower the cost of financial transactions. Consider the following attributes of Bitcoin: decentralization, transparency, neutrality, security, fungibility (bitcoin units are capable of mutual substitution), some degree of anonymity, no charge-backs, low transaction costs, and no taxes (no VAT is charged in the European Union). Moreover, Bitcoin is an anti-inflationary currency, as the maximum number of bitcoins that can ever be created is 21 million, an amount that is scheduled to be reached in the year 2140. And, very importantly, the price of a bitcoin is determined only by the law of supply and demand, not by a government or any other authority.
Specifically, the blockchain is a decentralized and digital public ledger that contains the records of all Bitcoin transactions ever processed. The majesty of this protocol resides in its transparency, resiliency, trustworthiness, security, efficiency, and low cost. Additionally, because of these attributes, the blockchain also allows the management of smart contracts and smart property.
Smart contracts are computer protocols that facilitate, verify, execute, and enforce the terms of a commercial agreement. Smart property is property whose ownership is controlled via smart contracts.
Banks may feel threatened by disruptive new technology. Although eradicating an idea is not possible, Jamie Dimon, CEO of JP Morgan Chase, thinks otherwise, saying that, “Virtual currency, where it’s called a bitcoin vs. a U.S. dollar, that’s going to be stopped.”
If banks want to satisfy their customers’ needs, they must innovate and have the right digital banking technology. Banks should get rid of their legacy IT systems and reengineer their business processes. Real-time services across digital IT structures, enabled by Bitcoin and the blockchain technology, would make banks better business facilitators and more accessible to poor people.
What do you think about the fees banks charge their customers? Do you think banks will adopt Bitcoin? Let us know in the comments below!