Security Notes: Banks Are Changing Before our Eyes

Since their inception, banks have offered two categories of services: a place to put money, and a means to grow money. Banks thrived because there was no viable alternative to their offer to safeguard our cash holdings. It is still true today, but not for long.

Bankers I talk to about how BitMint money works react with a moment of shock: “Checking accounts will be a relic of the past!” Indeed, I state, money for living and business will be sitting on people’s phone, safe, secure, private. Cryptography and software beats vaults and hardware. But that is not Doomsday, I assure them. It just means that you will have to focus on your money-related services: identifying creditworthy borrowers and sharing the profit with your depositors.

It is really revolutionary. This little shiny device in the palm of your hand is where money stays, ready to be used. Bankers are indeed shocked to realize that they are no longer indispensable as the only option to safeguard cash and liquidity in large quantities. There will be no rationale for keeping it there. And the coming fast-payment technology will not help.

A good bank has the skills, the expertise, the know-how to identify creditworthy borrowers and lend them money payable at a profitable interest rate. Banks say to their depositors: “You give us your money, and we will use our expertise to lend it to solid borrowers who will not default, but rather pay it back with interest, and then you, the depositor, and we, the banks, will share this profit.” Sounds like a good deal.
Only that today the banks use liquid short-term accounts to fund long-term loans, counting on the statistical premise that only a small fraction of these cashout-ready accounts is actually being cashed out at any moment.

This statistical expectation melts away when even a single bank somewhere far away is collapsing, threatening a chain reaction. To prevent one, we have the FDIC, which is too little too late.

The threat of systemic collapse is hinged completely on the imbalance between short-term deposits and long-term loans. But in the new banking reality, depositors will not use checking accounts or short-term saving accounts. They will use their phones for that handy money. Depositors will go to the bank to place their money to be tied up at long-term, promised interest, and the bank will then safely loan that money to long-term borrowers and then share the profit with the depositors. Bingo! No need for an FDIC, and no fear of a run on the bank because the imbalance between short-term and long-term money disappears.

Banks will be making a living on their competence in spotting good borrowers, and they will compete with each other as in all other industries. Meanwhile, the public will store its liquid cash on their computing devices, trusting cryptography rather than the alertness of bank regulators.

It is simple, but bankers are so reluctant to face it. There are very few runs on banks throughout history, not because their business model is sound (the disparity between short-term deposits and long-term loans is an inherent risk), but because depositors do not have mattresses big enough to keep their money. Reluctant and fearful, they return to the banks to buy money-keeping services. Technology changes this.

Bitcoin rose to fame in the European financial crisis of 2010 when scared depositors desperately searched for a safe place to keep their liquidity. Alas, Bitcoin is “air-based,” and is vulnerable to quantum computers. So different solutions are needed, like BitMint.

—Gideon Samid gideon@bitmint.com