Banks are about to be eliminated by DiFi and Central Bank Digital Currencies
DiFi and Central Bank Digital Currencies are about to revolutionize the financial world! It was recently revealed that the new digital dollar prototype would be introduced in the United States over the next few months. China also has a digital-only currency. It's known as the e-RMB. The renminbi, abbreviated as RMB, is the official currency of China. The People's Bank of China intends to launch the e-RMB, a crypto-inspired version of the renminbi, across the country. It will use a variant of blockchain in combination with a digital wallet app on devices to send and receive e-RMB.
Central Bank Digital Currencies (CBDCs) are the digital equivalents of the fiat currencies that people use in their everyday lives. CBDC, on the other hand, has the potential to significantly improve the development of a country's monetary policies while also deterring crime and poverty. Physical cash gives you anonymity because it’s offline. When you transact with dollar bills, only you and the other party have to know about it. But the only way to spend, receive, and store Digital Currencies will be via an app on your smartphone and all transactions will be recorded in a centralized database.
Governments may use state-sponsored digital currencies to restrict how much money people can have or what they can spend each dollar on. This would allow greater oversight and real-time changes, greatly improving state policies. Most countries need at least a couple of months to comprehend the current macroeconomic situation. This makes it much more difficult for policymakers to plan their economies effectively.
With that said, let us take a closer look at DiFi and Central Bank Digital Currencies and what they mean for you when they are launched.
What Is a Central Bank Digital Currency (CBDC)?
A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
Over the years, there has been growing interest in cryptocurrencies like Bitcoin and Ethereum, which work on a distributed ledger technology known as the blockchain network. Such virtual currencies have gained immense popularity, owing to their decentralized and regulation-free nature; with some seeing their rise as a possible threat to the traditional banking system that operates under the purview and control of a country’s regulatory authority, such as a central bank.
There is no certainty on enough reserves to support cryptocurrencies valuations. Moreover, new cryptocurrencies have continued to be launched and concern is raised about scams, theft and hacks.
Unable to control the growth and influence of such cryptocurrencies, many leading central banks across the globe are working on or contemplating launching their own versions of cryptocurrencies. These regulated cryptocurrencies are called central bank digital currencies and will be operated by the respective monetary authorities or central banks of a particular country.
Also called digital fiat currencies or digital base money, CBDC will act as a digital representation of a country’s fiat currency, and will be backed by a suitable amount of monetary reserves like gold or foreign currency reserves.
Each CBDC unit will act as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account. Like a paper-based currency note that carries a unique serial number, each CBDC unit will also be distinguishable to prevent imitation. Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes, and bonds.
CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system. The particular central bank or other competent monetary authority of the country will be solely liable for its operations.
• It widens the range of options for monetary policy: Implementing digital cash can allow new monetary policy tools to be used. If digital cash is used to completely replace physical cash, this could allow interest rates to be lowered below the zero lower bound. Alternatively, digital cash can be used as a tool to increase aggregate demand by making ‘helicopter drops’ of newly created digital cash to all citizens, making it easier to meet monetary policy target of price stability.
• It can make the financial system safer: Allowing individuals, private sector companies, and non-bank financial institutions to settle directly in central bank money (rather than bank deposits) significantly reduces the concentration of liquidity and credit risk in payment systems. This in turn reduces the systemic importance of large banks. In addition, by providing a genuinely risk-free alternative to bank deposits, a shift from bank deposits to digital cash reduces the need for government guarantees on deposits, eliminating a source of moral hazard from the financial system.
• It can encourage competition and innovation in the payment systems: The regulatory framework proposed would make it significantly easier for new entrants to the payments sector to offer payment accounts and provide competition to the existing banks. It would also reduce the need for most smaller banks and non-banks to run their payments through the larger banks (who are able to set transaction fees at a level that disadvantages their smaller competitors).
• It can help address the implications of alternative finance upon money creation and distribution: Non-banks, such as peer-to-peer lenders, are competing with banks and taking on a larger share of total lending. This has implications for money creation and distribution. When a bank makes a loan, it creates new deposits for the borrower. But when a peer-to-peer lending firm makes a loan, it simply transfers pre-existing deposits from a saver to a borrower; no new money is created. By proactively issuing digital cash, the Central Banks can compensate for any shift in lending away from money-creating banks, and the subsequent fall in money creation.
• It can improve financial inclusion: The firms providing Digital Cash Accounts would be payment service providers first and foremost, whereas banks are primarily lenders. Digital Cash Account Providers are therefore likely to offer accounts to those customers that are excluded from conventional banking services.
A central bank digital currency would likely be implemented using a database run by the central bank, government, or approved private-sector entities. The database would keep a record (with appropriate privacy and cryptographic protections) of the amount of money held by every entity, such as people and corporations.
In contrast to cryptocurrencies, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would likely not be required or useful - even as they were the original inspiration for the concept.
The Bank of England already issues digital currency, in the form of deposits held by commercial banks in accounts at the Bank of England. It can provide digital currency simply by making these accounts available to non-bank companies and individuals (without the need for a Bitcoin-style distributed ledger payment system). There are two ways this can be done.
In a Direct Access approach, the Bank of England could provide accounts to all citizens in the UK, along with the payment cards, internet banking and customer service requirements this entails. However, the Bank of England is likely to see this as inappropriate state involvement in the private sector and a significant administrative burden.
Consequently, I recommend an Indirect Access approach, in which the Bank of England or whatever would still create and hold the digital currency, but all payment and customer services would be operated through “Digital Cash Accounts” (DCAs) provided by (or ‘administered’ by) private sector firms. These private sector “DCA Providers” would have responsibility for providing payment services, debit cards, account information, internet and/or mobile banking, and customer support. Any funds paid into the DCA would be electronically held in full at the Bank of England, so that each DCA Provider could repay all its customers the full balance of their account at all times. DCA Providers are prohibited from lending or taking any risk with their customers’ funds.
The Indirect Access approach is a much more market-driven approach which will help to increase competition in current and payment account services. It minimizes the administrative burden on the Bank of England. Conveniently, the regulatory framework for this approach already exists in the form of the Payment Services Provider model (with minor adaptations).
Why is DeFi important?
DeFi (or “decentralized finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, you can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it’s faster and doesn’t require paperwork or a third party. As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), pseudonymous, and open to all.
DeFi takes and extends Bitcoin's basic premise— digital money—creating a complete digital alternative to Wall Street, but at no cost (think office towers, trading floors, banker salaries). This has the ability to build transparent, free and equal financial markets for those who have an internet connection.
Users typically engage with DeFi via software called dapps (“decentralized apps”), most of which currently run on the Ethereum blockchain. Unlike a conventional bank, there is no application to fill out or account to open.
Here are some of the ways people are engaging with DeFi today:
- Lending: Lend your cryptocurrency and receive interest and rewards every minute, not just once a month.
- Getting a loan: Obtain a loan immediately without filling in paperwork, including very short-term “flash loans” that conventional financial institutions don’t offer.
- Trading: Make peer-to-peer transactions of specific crypto assets, much as you might buy and sell stocks without a middleman.
- Saving for the future: Put some of your cryptocurrency into savings account alternatives to gain higher interest rates than you would normally get from a bank.
- Purchasing derivatives: Place long or short bets on specific properties. Consider these to be the cryptocurrency equivalent to stock options or futures contracts.
Banks must be abolished
What banks do is generally a scam... they should be replaced by a future-credit system that is available with risk and reward equalizing insurance... you pay in the risk with other people who want to "fund" you with loans and so on, but the risk category/level is what generally says you won't gain that much in the future because it goes to covering the other defaults in the loan risk level. That is, anyone who receives loans in lower risk categories never contributes to the repayment of loans in higher risk categories... which is the inverse of what banks do now by completely spreading out risk to everybody who works with banks... what banks do is a “managed insurance” scam because they should be required to have insurance parameters and risk profile pools on the loans they make with the loan. Once the scale of the risky bets is reduced and they are made aware of the dangers, civilization will be much more prosperous AND better able to concentrate on the future.
The system works well; it's just outdated words that fail to explain the system's functionality, and as a result, bankers' scams go unnoticed as they skim off the transactions and use the I.O.U.s as leverage in an ever growing wealth bubble that's really just a bunch of accounts with I.O.U.s built on top of I.O.U.s for a currency paying out I.O.U.s for I.O.U.
It would work great and there would be no corruption or repeated "banking collapses" if everyone using the system could see what was going on, but once you expose bankers as skimmers on 20X their deposits of I.O.U.s, the system would fall apart as people lost faith in the current status quo.
As brilliant individuals... ten bankers get together and say, "Because we all have houses as collateral, why don't we all start banks?" Ten of us will get loans from each other for our houses and use the deposits as leverage for loans to enable another ten to twenty people to buy houses at inflated prices, driving up the real estate market value and increasing the value of our houses.
See what I did there? I just made everything a banker does transparent, so ten banks took assets worth say $10 million and ballooned them into $100-200 million of “bank assets” that increase the potential for house prices to rise... they take a figure out of their a$$ that says an employee can get a loan that takes payments of about 1/3rd of their income, or more in some cases, and say you can leverage your future income to buy a $1 million house... If interest rates were as high as they were in the 1980s, no one could afford a home today...
People in the hedge fund industry who are aware of all of this use it, along with some interesting data on market activity, to raise capital from markets at amazing rates of return.
All the while, they are destabilizing the asset buffer by people who are attempting to do something with assets, aka productivity...
So, actually, it's a pledge on a promise on a promise to do something that keeps this economy going... and those doing something are down to less than 5% of the workers feeding the world and keeping the commitments fed and alive. Debt within a nation is reasonably rational... as long as it is not concentrated in a few hands. The problem with wealth concentration is that less and less capital is flowing to keep people motivated and thriving in a population that is normally increasing, resulting in less productivity.
Money is simply a carrot stick that motivates people to do something... the something is the transfer of time and resources to accomplish something, transformed into a currency that is temporarily stable — bankers, on the other hand, always devalue currencies over time, so something that cost $20 in 1989 now costs $40 due to cumulative inflation.
Except that certain goods have become so inexpensive that we don't completely see the inflationary devaluation of assets and wages, declines in real wage value even with annual incentives, and salary rises have fallen faster than inflation... so the real scam is the inflated money makes that carrot look a lot larger, but it's still the same tiny carrot.
The entire reason bankers can come along and manipulate everyone is because of everyone's reliance on the monetary system, which is largely due to a lack of other ways to do things in a freedom-respecting manner at a time when people could meet their resource needs without being individually capable of obtaining all they need. The need for this medium of trade has largely vanished as a result of technological advancements.