Banking vs Crypto

  • Published At: 07.02.19 02:59
  • Last Updated At: 30.11.20 08:04
  • Total Views: 594

We live in a broken financial system, a system that is doomed to fail every single time. This is called fractional reserve banking, and it allows commercial banks to profit by loaning a part of their customers’ deposit and just a fraction of the deposits are stored in the account as real cash and is available for withdrawal.

Commercial banks hold a minimum percentage of the money that is deposited in their accounts and they loan out the rest. From an accounting perspective, when the bank makes a loan, both the bank and the person who is borrowing count the funds as assets. They double the original amount from an economic standpoint. The money is then re-used, re-loaned multiple times and that leads to a multiplier effect.

Abracadabra, they create new money out of nowhere.

How does it work?

When someone makes a deposit in their bank account, that money is no longer the depositor’s property, not directly. The bank now owns it, and in return, you receive a bank account where you can withdraw your money. In theory, the customer should have access to their deposit amount on demand but that is not true. The bank doesn't hold on to the full amount, only a fraction normally from 3% to 10% and the rest is loaned or used for operations.

So if they loan out their customer’s money, what would happen if a large group of people decided to withdraw their money?  This is known as a bank run and since the bank only holds a fraction of the customer’s real cash it would cause the bank to fail. In a nutshell, what you see in your account is not real cash, just a number and you have way less than that.

An example of a bank run would be the Great depression in 1929 or the mortgage bond crisis in 2008. Usually, people don’t take out their money all at once, but they will if they think the bank is in serious trouble.

Many economists believe that the fractional reserve banking system is unsustainable and risky because the current monetary system is based on credit/debt and not on real cash. The current economic model relies on the premise that people trust their banks and the government.

Contrary to the system, we have Bitcoin, which is a decentralized digital currency that introduces a very different economic framework. A distributed network of nodes runs Bitcoin and its data is protected by cryptographic proofs and constantly recorded on a public ledger called the blockchain. There is no need for a bank or any kind of intermediary with Bitcoin and no such thing as fractional reserve. Also, the issuance of Bitcoin is finite, it is simply not possible to generate coins from thin air like traditional banking. You have a fixed amount and it cannot be modified ever.



Sahay (16) 1 year ago

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