Why bitcoin and public blockchains trump trusting the banks
This article was published on the April 11, 2016 on the Finance Magnates website
By First Global Credit CEO Gavin Smith
Government and commercial banks have been using both overt and covert strategies to devalue and if possible halt the adoption of public blockchain technology. The outward face ranges from the cautious acceptance of digital currencies by the UK and Hong Kong to the downright protectionist strategy of New York State through the Bitlicensing laws.
The covert strategies are typified by a three pronged approach: (1) Exploit any opportunity to denigrate bitcoin regardless of accuracy usually based on the stability of bitcoins or legitimacy of use. For instance, linking bitcoins to terrorism or drug purchase. (2) Broadcast generalised statements supporting the idea that private blockchains have all the benefits of the public blockchains and that banks are better custodians of the public’s welfare than the inexperienced organizations driving public blockchain development. (3) Then into this framework, publicize specific initiatives like RSCoin, a centrally controlled digital currency created by the Bank of England. The claim is being made that RSCoin is a panacea that will solve all the problems that have shadowed banks over the past decade.
While RSCoin does show some incremental improvements to the transaction flow currently in use in the conventional banking industry, it lacks many of the benefits offered to the public by a genuine, independent digital currency. However, this is not what is being broadcast by the media, who in all probability lack an understanding of the relationship between central and commercial banks, which is why RSCoin does nothing to change what has gone on in the banking industry over the past decade. For instance, in a recent article published in the Business Section of The Telegraph it has been claimed that RSCoin will “erode the exorbitant privilege enjoyed by commercial banks of creating money out of thin air under a fractional reserve system.” The same article also claims that RSCoin would allow Central Banks to “turn the money tap on and off with calibrated precision.”
The problem with these arguments is that, if examined critically, they are in direct conflict. How exactly is it proposed that RSCoin would facilitate the Central Bank “Turning On” the liquidity tap? By pumping money into the hands of the public? Of course not – it would be pumped (as happens now) into the coffers of the Commercial Banks in the form of government subsidized loans which would enhance their ability to make loans with their customers’ money. This is the very definition of fractional reserve banking and what the supporters of RSCoin claim it will prevent. It is the collusion (for want of a better word) between the Central and commercial banks that is created through the current use of the ‘money tap’ that should be at issue, not the precision of that ‘tap.’
RSCoin is new technology being built to support a flawed system that ultimately burdens the tax payer and distorts saving and investment markets (ask any pensioner who has been forced to survive on near zero interest rates over the past 10 years). It is policy, not precision or technical superiority that is the problem that needs addressing to dis-intermediate commercial banks. It is therefore no wonder that commercial banks are jumping on board to support RSCoin which can be viewed as a wonderful way to maintain the status quo while showing a public face that appears to support a new ‘fairer’ type of banking.
The information cited in the paragraphs above can be verified through a variety of sources for instance: https://en.wikipedia.org/wiki/Fractional_reserve_banking#Criticisms_of_fractional-reserve_banking. That is why it is the duty of those of us who have an in-depth understanding of the relationship between central and commercial banks to make that information available to the general public to encourage a dispassionate assessment of initiatives like RSCoin.
Public Digital Currency, such as bitcoin, has no tap for the Central Bank to turn on or off. Commercial Banks would be forced to manage their affairs more in line with their customer’s best interests because there is no Central Bank spigot to pump liquidity into an organisation that has behaved imprudently with their customer’s funds.
The very fact that this is the case would force banking regulators to ensure that banks had sufficient short term capital to meet customer demands and disengage from risky business areas which, because the public purse can be called upon to bail out the banks, are nothing more than “Heads we win – Tails you lose” speculation with customer money.
Who can tell if fiat currencies will continue to dominate regular day to day transactions? But the fact that there is an alternative store of value for customers that is independent of Central Bank / Commercial Bank influence is a positive factor and something that is completely lost with centrally controlled digital currency.
These are some of the touchpoints that having public blockchains will affect:
- Central banks will no longer have the flexibility to manipulate money supply in a way that disadvantages the tax paying public.
- Central banks will no longer be able to force interest rates to zero; there is a growing bitcoin money market that enables savers to achieve a return on their bitcoins even when fiat interest rates have been driven into negative territory.
- Commercial banks will no longer be provided with a free pass to borrow from the tax payer at 0% while charging those same tax payers 7% to 39.9% on retail borrowing.
Public blockchains will have the ultimate effect of forcing banks to behave as genuine commercial entities instead of being part of a monopolistic, protected industry as is currently the case.
About Gavin Smith:
With a financial service background that spans almost 3 decades and a career that covers both options market making in the pits of London’s LIFFE Exchange to managing the hedging strategies of one of the world’s largest metal traders, Gavin Smith bring vision as well as hard won expertise to the digital currency markets. Gavin’s in-depth understanding of financial markets coupled with a commitment to becoming a driving force in the creation of the digital currency capital market give him a unique voice in the debate about the development of public blockchains and the bitcoin capital market.
About First Global Credit:
First Global Credit is the world’s first Finance Company that brings the profit opportunities existing in mainstream markets within the reach of digital currency holders. With a presence in Geneva, London and Hong Kong, the company has been founded by risk management specialist Gavin Smith and Financial Data Security Company Director Marcie Terman. Smith and Terman head a team with over 35 years’ collective experience building and managing trading and back office systems for world-class trading companies and banks operating in London and Geneva.
The objective is to become a market leader in the Bitcoin Capital Market by providing services that accept bitcoin as a valuable asset that can be used to generate a return. We deliver these services with a focus on customer care not generally found in digital currency companies. First Global is committed to assisting our customers meet their financial objectives for their digital currency portfolios. Our systems are built using bank grade technology and security and are housed in Financial Grade Tier III Data Centres with failover capability. Our processes are designed to assure the privacy of our customers alongside the security of their assets.
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