Post Great Recession: The Decentralization of Currency
When banks invest in loans, they take certain risks. Some borrowers have very bad track records, and some projects that the borrowers invest in are extremely volatile. It is against the banks' ethical guidelines to invest in these problematic accounts. But what led to The Great Recession back in 2007-2008 was just that; banks gave out crazy loans to businesses that were clearly unable to pay back the money.
Why did they take such risks, you ask. Simple: because they carry with them a Get-Out-Of-Jail-Free card more often referred to as a Central Bank's Capital Guarantee.
How Banks Work
The simplest mechanism of every bank is to attract savings from you with an interest guarantee of, say 3% per annum, and use your money to loan out to businesses for 6% per annum. Their profits would then be 3% per annum.
Of course there are more to it than this, but everything comes down to the simple purpose of channeling funds from the haves to the needs and making some money in between.
Why did they take such risks, you ask. Simple: because they carry with them a Get-Out-Of-Jail-Free card more often referred to as a Central Bank's Capital Guarantee.
How Banks Work
The simplest mechanism of every bank is to attract savings from you with an interest guarantee of, say 3% per annum, and use your money to loan out to businesses for 6% per annum. Their profits would then be 3% per annum.
Of course there are more to it than this, but everything comes down to the simple purpose of channeling funds from the haves to the needs and making some money in between.
Capital Guarantee
Banks are the monetary backbone of any country because it allows the savings of the nation to be channeled to businesses and investments which will ultimately lead to greater opportunities and advancements. In order to create a sense of security among savers, the central bank of a country, i.e Bank Negara Malaysia, will provide a Capital Guarantee to banks. This ensures that in case a bank folds and looses all the savers' money, the central bank will come to the rescue either by coughing out the lost funds or get another bank to absorb this closing bank. It is imperative that savers cannot lose confidence in banks.
Then why, you ask, did the central banks of the few recession-stricken countries not bail these reckless banks out back in 07? It comes to a point when one asks just how many closed-down banks can be absorbed before even the strongest of them get cold feet and how much money can be printed before the currency starts over-inflating?
Banks are the monetary backbone of any country because it allows the savings of the nation to be channeled to businesses and investments which will ultimately lead to greater opportunities and advancements. In order to create a sense of security among savers, the central bank of a country, i.e Bank Negara Malaysia, will provide a Capital Guarantee to banks. This ensures that in case a bank folds and looses all the savers' money, the central bank will come to the rescue either by coughing out the lost funds or get another bank to absorb this closing bank. It is imperative that savers cannot lose confidence in banks.
Then why, you ask, did the central banks of the few recession-stricken countries not bail these reckless banks out back in 07? It comes to a point when one asks just how many closed-down banks can be absorbed before even the strongest of them get cold feet and how much money can be printed before the currency starts over-inflating?
History of Money
Money is simply a medium of transaction between parties so we don't have to constantly barter commodities out only to people who actually need them. They have been represented by gold, jade, opium, rocks and other rare objects of value. Then money became carefully produced pieces of paper, by itself is of no value if not for it's ability to command trade.
Today however money has been reduced to digital numbers in accounts. We buy and sell goods and services through the movement of numbers in our bank accounts and credit card allocations without so much as seeing physical cash.
Currency is a Commodity
Imagine that currencies now are goods like apples and oranges. If you have apples and want oranges, you would need to find someone with oranges and need apples. And if more people sell apples than they do oranges in the market, you would need to give them more apples for every orange you want to receive. This is because it is easier for them to get apples than for you to get oranges, which make apples cheaper than oranges.
But what if you have a trading medium instead? What if you can give anyone this medium for your oranges so they can use the same medium to buy whatever they want? And at the same time you do not need to pay intermediaries commission for making this trade for you? The world now gives you decentralized currencies that will do just that. They are called Bitcoins and Ripples.
Bitcoin
The idea of Bitcoin is pretty far sighted at the moment. It aims to ultimately not only change the way we use money but also make them. Bitcoins can be mined using various websites and apps. These websites and apps work through complicated algorithms and give you Bitcoins if the algorithms match, hence the term mining.
I do agree it does seem pretty far-fetched and undesirable to deprive oneself physically from society and the outside world, but the mining of Bitcoins will not last forever as there is a set number of Bitcoins available to the world at any given time. This will prevent the world from opting to mine Bitcoins instead of running bakeries and coffee shops.
And like any new currency it will continue to be subject to speculation and will remain volatile until enough people adopt this currency and strengthen it.
Ripple
Unlike the Bitcoin, Ripple does not make mining an option. It is simply a medium of trade between currencies that is not controlled by any financial institutions. This will free transactions from intermediary charges, kind of like what currencies were suppose to be.
Here are two ways you can transact money across national borders. You're in Malaysia and want to send money to your brother in New Zealand:
1. Send money through Western Union, get charged for their services. Conversion of currency will incur additional middlemen charges too.
or
2. Convert RM to Ripples, send equivalent to him so he can convert it to NZD, no charges are incurred.
Inconsistencies in The Economy
Imagine that if we all decide to use Ripples and Bitcoins as our trading currencies instead of financial intermediaries. Nobody will require currency exchange services, swaps, options, hedges and futures. People will start choosing to save and invest their money through Ripples instead of banks, which will ultimately lead to a drastic decrease in the market for banks.
These are all just imaginary 'What-Ifs' that may not even happen the way I predict because as the economy shifts, financial institutions will follow suit and adapt to the change as well. But do not for one moment assume that decentralized currencies will not take flight due to their volatility now.
The Future of Money
The very interpretation of money is evolving and there's nothing we can do to stop it. We only heard of decades ago when people used to tuck money under their pillows, and now we are making daily transactions by hardly ever using physical cash.
Sure everyone will tell you now that it's impossible and ridiculous and that decentralized currencies will never work. But that was what they said about paper monies, banks, cheques and credit cards when they were first introduced.
