For several hours on Wednesday, the digital services used by the U.S. Federal Reserve to clear transfers between banks were offline due to an “operational error”. Bitcoin custodians were calling for the reliability of their payment network, distributed among computer mining coins. Zac Prince, chief executive of BlockFi, a crypto lending company, showed more inhibition, revealing on Twitter just that payments over cryptofollow you operate normally ”.
One argument for buying and holding bitcoin is that cryptocurrencies will eventually replace the banks themselves, as their services will no longer be needed to store and transfer money. This, in turn, makes bitcoins so valuable that they replace “dirty” dollars as a frontier currency, leaving those with bitcoin in possession of the same real money.
Holding any funds in the hopes that money will certainly be a long-term investment strategy. But it also shows a flawed understanding of how dollars work, and who creates them now. Most of what is currently operating as a currency in the US and any developed economy does not come from the government. It comes from commercial banks. Banks don’t just keep money, or transfer it. They create it.
Misunderstandings about this are widespread enough that the Bank of England issued a paper in 2014, Money making in today’s economy, to clean things. University textbooks teach that banks take out deposits, then lend them. This is just backwards, the BoE explained. A commercial bank decides to grant the loan first, then it goes up the balance in your account. That top is modern credit money.
“Fiat” money known as bitcoin backers is usually defined as money donated by the government that is not backed by funds like gold. But a lot of fiat money, which we use for purposes such as paying taxes, is in fact the basis of loans, regulated by governments but made by commercial banks.
Creating new credit money is a good business, which is why, generation after generation, people have found new ways to lend. U.S. historian Rebecca Spang features in her book Material and Money in the French Revolution that the monarchy in pre-revolutionary France, to get around usury laws, took lump sum payments from investors and brought them back in lifetime rents. In 21st century America, shadow banks are pretending not to be banks to circumvent rules. Borrowing happens. You can’t stop borrowing. You can’t stop it with distributed computing, or with an interest in the heart. The profits are just too good.
This is something that investors around Bitcoin already understand. Take for example Prince’s BlockFi. The company is launching a credit card, a joint venture with Visa. The card provides rewards for buying with Bitcoin instead of thousands of airlines. The purchases, however, are paid for by a consumer loan, just like any other credit card.
Nexo, another crypto-finance company, will lend fiat money against Bitcoin, at a loan-to-value ratio of 60 percent. That loan is like modern credit money. Similarly, Kraken Financial, a crypto-coin bankrupt, lets you trade on a so-called margin account where they lend you part of the purchase price of a coin.
The language of all these companies is variable. BlockFi promises a “financial future”. Coinbase, a cryptocurrency exchange that filed for initial public offering on Thursday, wants to “create an open financial system for the world”. They all seem to be doing, however, earning taxes and interest on loans. They make fiat credit money. Why not? It’s a good business.
Bitcoin is turning out to be a great way to consolidate our existing system. A lot about this system works poorly. The provision of credit money can be volatile, as banks stop lending in a recession, right when people need them most. There is little incentive to extend cheap credit to people who need small loans. But there aren’t many, so far, that seem to have made Bitcoin to fix these things, and it’s not at all clear how to do it.
Just the job of making fiat credit money for everyone: work. It takes patient management. You need to go out in the world and meet people outside the financial system, then motivate lenders to offer products that bring them in. He negotiates hard with the people who make a lot of profit on lending money. This alone will not happen simply because there are new assets in the world. Bitcoin lenders promise something like a new political party – good money for the people! So far, however, they seem to be just like any other group of bankers.