Mark Twain once wrote: “A banker is a guy who lends you his umbrella when the sun shines, but wants it back the moment it starts to rain.”
Human beings have a long history of consuming today and paying tomorrow. Credit is not something new. The activity is old. Already in the Paleolithic there were people in debt. Of course, for the purposes of this article we do not have to go back to prehistory. Modern banking began in the 14th century in northern Italy. Due to trade with Asia, Africa and the other regions of Europe, wealth began to accumulate. And the need arose to use that money to produce more money. Bankers financed travel and exchanged currency.
In practice, bankers served as intermediaries between wealth accumulators (lenders) and merchants (borrowers). Some had the money. The others were in need of money. In other words, the former financed the latter. Thus, wealth was put to work. The money circulated and was not hoarded. In this sense, credit moves the economy.
The capitalist has the incentive to lend his capital for interest. It’s about making money using money. Now, credit is two things at the same time. It is active for the lender. And it is passive for the debtor. We are talking about a win-win business. The debtor obtains the financing he needs. The lender gets the profit he wants.
Of course, this “business” has its risk. In the 14th century, ships were frequently lost at sea, and goodbye to merchandise. The economy of scale and diversification were presented as the preferred solutions for the first bankers like the Medicis. Bankers meet two great needs: borrow short and lend long. Which is very convenient in most cases. However, it exposes a huge vulnerability. If many depositors withdraw their money at the same time, that creates a liquidity problem. What can cause a bank run. If the bank’s liabilities (savers’ deposits) are liquid and the bank’s assets (loans given) are illiquid, a massive withdrawal is quite problematic.
On the other hand, we have to mention the risk of default. A debt is a promise. Take the money today and pay it back tomorrow plus interest. The liability of one is the asset of the other. However, if the debtor does not pay his debt, that default becomes a loss for the creditor. What if the lender made the loan with borrowed money? In the case of a bank, a default means a loss for the banker. And, at the same time, it could also mean a loss for the bank’s depositors. Because the bank works with the money of its clients. By losing customers’ money, the bank loses its ability to respond to withdrawals.
Now, suppose that person X does not trust banks. And he decides to keep all his money under the mattress. In a way, by not dealing with the banks, person X solved the banking problem. By not lending your money, the risk of default is nil. By not lending your money, illiquidity or bank runs are not a concern. The problems of person X are others. What would happen in case of fire? In case of theft? In case of a flood? And the moth? In short, win other problems. But, without a doubt, he managed to solve the banking problem. Victory! Bravo!
In effect, we can buy Bitcoin. And write down the private key on a piece of paper. Or we can store it in an electrical device. We can be our own custodians. TRUE. We can put our money under the mattress and that’s it. And, in a way, we look like person X. We have solved the banking problem by not placing the money in the banks. Traditionally, this has been the ultra-conservative solution. I am referring specifically to the old man from the country who kept his gold in the yard, grew his own food on his property, and defended his family with a shotgun slung on his back. Paranoid and self-sufficient. Son of the radical individualism of the Protestant ethic.
However, we return to the issue of credit. And the credit? What do we do with idle wealth? How do we get financing? We must remember that the human being does not feed on digital codes. Which implies that, with Bitcoin or without Bitcoin, society must work to produce goods and services. And all this operation requires capital. Capital needs to be placed in productive activities. And the production needs financing. Labor and capital.
The use of gold as money never solved the banking problem. Because the use of a particular form of money does not eliminate credit risks. Credit risks are reduced in multiple ways. Bank insurance is part of the solution. Regulation is part of the solution. A “lender of last resort” is part of the solution. An effective judicial system is part of the solution. Better technologies. diversification. Reputation systems….
What to do before the risks? The first solution is to avoid them at all costs. Don’t take risks. How do I avoid the risk of theft? Do not go out. Not having positions. Total evasion is an extreme, but effective solution. However, he who does not risk does not win. To grow, you have to take some risks. Which brings us to the second solution. Manage risks. In other words, take measures to cover the risks as best as possible.
Can Bitcoin solve the banking problem? No. Or, put another way, Bitcoin or no Bitcoin, credit and bank related risks still need to be managed using multiple mechanisms. Self-custody is not a solution. Because isolation is not for everyone. Simple. People like to do business together. And sooner or later, someone will say to the other: “I’ll take this and I’ll pay you tomorrow.”
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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