23
Jan
2016
0

Fiatcoin, redefining Banks and Banking

My weakly grounded assumption is that central banks will slowly adopt consensus ledger technology and that eventually physical cash will be fully replaced by cryptocurrencies. I have read several blog posts on the subject to educate myself, which have raised more questions in my mind – economics and monetary policy not being my forte.

I recommend a few, see here by @jp_konighere by @dandolf and here by @codedlogic where the respective authors delve into payment systems, money as a unit of value and monetary policy. I am particularly interested in the impact fiatcoin – fedcoin is too US centric of a term – would have on the fractional reserve banking system and the roles of banks in any financial services ecosystem.

I will ask you to suspend disbelief and assume that the technology challenges have been ironed out – it is only a matter of time –  and that a central bank has chosen the right consensus ledger stack – after tinkering with every other alternative, let’s trust regulators with eventually choosing wisely – with an appropriate consensus algorithm layer (something more optimal than proof of work) and an appropriately scripted monetary policy (something else than a deflationary construct).

Now, the remaining vectors needed to be fleshed out are the network topology (which participants are allowed to interact with fiatcoin and in which capacity, that is read/write/read&write) and what the use case is.

To simplify these two choices, let’s assume a binary choice for network topology: a) only available to financial services incumbents (banks, non banks) and b) available to the everyone; and a binary choice for use case: a) as an inter banking payment settlement system or b) as a unit of measure and store of value.

I can conceptualize a natural timeline that would culminate into making fiatcoin available to every individual. The implications of such end goal are massive and range from how to treat AML/KYC, the desirability or undesirability of anonymity, the complete phasing out of physical cash, interest bearing capabilities… – the articles I refer to above mention some of these implications.

The implications of the starting point are equally tantalizing, if the starting point is for a central bank to make fiatcoin available to banks and non-bank financial services institutions.

Imagine banks, hedge funds, private equity funds, asset managers, insurance companies, any non-bank financial services entity able to directly transact and hold accounts in fiatcoin with a central bank.

Would such wholesale market structure eliminate TBTF institutional risk (too big to fail) by spreading access to central bank money to all institutional holders?  How would frb (fractional reserve banking) be impacted. How would the availability of credit be impacted? How would regulation need to evolve to cover all institutions?

i do not know if TBTF risk would be eliminated altogether, yet I am quite sure it would be reduced under wholesale fiatcoin. I do not know if frb would be eliminated altogether, yet I am quite sure many large banks would shrink their balance sheets as a result of fiatcoin while many alternative lending platforms or shadow banks would fall under closer oversight from a central bank. A desirable outcome fostering less volatility – most certainly from a central bank’s point if view one would think?

Other questions come to mind: What of cross border transactions? Would various central banks use the same consensus technology stack with same or similar features (consensus algorithm, network topology, monetary policy scripting) thereby ensuring optimal interoperability? Would central banks introduce a tiered approach with a shared metafiatcoin only available and transacted amongst themselves (hello IMF and SDRs) linked to country or country unions’ specific fiatcoins (fedcoin, eurocoin…)

Until fiatcoin would be made available to the public – and I am also convinced this will happen sooner than we think – how would financial institutions intermediate between fiatcoin and physical currencies (physical or digital cash)?

I realize all these questions lead us to rethink what a bank will do in the future and how it will compete. Deposit gathering and credit intermediation may not be the end goal anymore. And that is what banks need to focus on, amongst other things.

 

 

 

 

 

 

 

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2 Responses

  1. Mark Pey

    Hi Pascal and welcome down the rabbit hole, I think you’re thinking about *banking* when you might instead be thinking about *money* and its very nature. We’re all conditioned to think “money” and “credit” are somehow inextricably linked but they need not be, yes it’s seductive to be able to create something “valuable” by merely borrowing it into existence (like our current system does) but inevitably the temptation is too great, the supply expands faster than the income to service the debt does. Hence our current predicament where the only way debt-based money can be serviced is by pricing its NPV at zero (or even below zero in the Eurozone and elsewhere). So we can have FedCoin, FiatCoin, MegaFiatCoin, or whatever else you like but if they are created and issued the same way the USD and EUR etc are today then the problems remain: ever-increasing quantities of debt, zero reward for savings, wealth concentrating ever upwards closest to the “money” spigots, and a race to zero or below with competitive debasements (“I know, we’ll make our country richer by making our citizens poorer, good idea”. The percentage of times this has worked out in the past = 0.

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