The definition of trust is, “a firm belief in the reliability, truth, or ability of someone or something”.
Late last week, it was reported that Credit Suisse is facing a potential run-on deposits as clients become increasingly concerned about their banks’ liquidity.
Silicon Valley Bank, Signature Bank and Silvergate are also victims of liquidity. Throughout March, financial analysts, journalists and experts within the banking sector have blamed these events on mismatches in debt and liquidity ratios alongside unexpected increases in customer withdrawals in an effort to label them as outliers and the system as generally trustworthy.
The reality is that banks must only hold a minimum capital adequacy ratio of eight percent
The reality is these banks simply don’t have your money sitting in liquid funds. They have adhered to regulated minimal capital ratios of eight percent and, in turn, any bank facing a run on deposits is likely to fail in exactly the same way. The problem isn’t the mismatching of liquidity ratios and overexposure to the bond market within the banking system – the problem may be the system itself.
In 1988, the central bank governors of the Group of Ten (G10) countries concluded over a decade of deliberations by reaching an agreement over a set of minimum capital requirements for banks known as ‘BASEL I’. At the time, it was a slow response to the increasing number of banks that had failed throughout the 70s and 80s.
In short, BASEL 1 required a bank holding US$100 million of risk adjusted assets to maintain capital of at least US$8 million (eight percent). This was an enormous impediment for a sector systematically designed to drive a profit margin through loaning out customer deposits.
It’s important to note that the systematic bank failures that saw the BASEL 1 regulations emerge were not new. The banking sector had been struggling with severe lack of trust even before 1988. The Great Depression of 1929 saw one-third of all banks in the United States fail and following decades saw many other banks collapse.
Immediately prior to the Great Depression, in 1893 the world experienced what was, at that time, the greatest depression to date. In fact, throughout the entire 1800s the economy and banking system were hugely dysfunctional. The United States itself had a reputation of not repaying its debt and many European banks refused to lend to them.
In 1791, we saw the United States form its first central bank, which failed. In 1813, it formed another central bank, which also failed and, in 1907, it formed yet another central bank to specifically safeguard against a ‘run’ on banks to restore public trust, which subsequently turned out to be the United States Federal Reserve.
Ancient Egypt got the banking system right
In 300BC, Ancient Egypt established one of the most sophisticated banking systems our world has seen. It was a system so well developed that it was comparable to major modern banks in terms of branches, employees and transaction volume.
These banks were successful because they simply deposited clients’ grains and allowed them to be retrieved. They weren’t printing 92 grain vouchers for every eight grains held (eight percent) and loaning them to third parties, possibly causing a run on grain. In ancient times, financial institutions kept what you gave them until you picked it up.
The modern banking system, by comparison, has been fundamentally designed to finance itself through utilizing your deposits.
The modern banking system, by comparison, has been fundamentally designed to finance itself through utilizing your deposits and therefore the banking system will continue to operate centralized, collective pools of your cash, assets and debt, in which depositors inherently trust a board of experts to manage risk accordingly and return those assets, including money, on call.
How digital currency could save the banking system
Today, 19 of the G20 countries have active strategies around the formation of Central Bank Digital Currencies (CBDC).
Digital currencies have the power to restore trust due to the simplicity of anyone being able to own a digital wallet. This means digital currency has the power to be held directly by you, instead of being sent to a centralized bank to be held on your behalf in a centralized pool of assets managed by experts adhering to eight percent ratios.
The ability to be able to hold an asset directly, as opposed to being a participant in a centralized pool that you are reliant on, is the very crux of decentralization.
Decentralized financial platforms give users the ability to hold assets directly in their wallets, meaning no one but you can move it and ‘plug and play’ with decentralized financial or banking platforms offering exchange, trading, saving, debt/finance and asset compatible products.
A clear path exists for CBDCs to solve the issue of trust, and allow people to hold fiat money securely in an account they control and without any risk.
Digital currency and decentralization may be the solution to trust within the banking sector. This may become more apparent as governments issue digital currencies. However, as digital currencies seep through the economy, the banks may face their own crisis because, for the first time in history, it becomes possible to live without a bank.
We don’t necessarily need to wait for banks to fix the problem. Digital currencies exist, they are just horribly untrustworthy, difficult to navigate and can be unstable.
This environment has been a crucial part of the BullionFX mission to develop the world’s first institutional-grade gold digital currency (GOLD), which provides a stable digital currency on which platforms and future digital banking applications can be developed. BullionFX, as a platform, allows users to hold their own funds and assets directly in their wallet, connect to interact and securely hold and transact wealth in any digital asset including GOLD.
The BullionFX ecosystem will develop with the industry and future regulations to allow users to utilize GOLD or any digital currency to earn, access debt markets, assets and other products on the blockchain (property, stocks, etc.).
Stephen Moss is the founder of BullionFX, a decentralized financial ecosystem built on auditable physical gold.