What do banks do with your money? This is why we need to embrace Bitcoin (BTC)
Bitcoin vs banks
What do banks do with your money? This is why we need to embrace Bitcoin (BTC)

By MichDon | MichDon | 8 Apr 2020


What can banks do with your money? You would say that money is money and just remains yours when you deposit it in the bank. However, the answer is a lot more nuanced.

Bitcoin or the banks

Thanks to bitcoin (BTC), and to a lesser extent other crypto coins, more and more people are thinking about this question. Because what can a bank actually do with our money?

When you delve into bitcoin, you read about the monetary system and more and more is discovering how banks and financial institutions work.

To answer the opening question, we ask three questions:

1. Can I always spend the money I have with the bank for free?
2. What does the bank do with the money I deposit with them?
3. If I invest in a financial product, where does that money go?

Free money

The answer to the first question immediately provides an interesting answer. The answer is: "no, you can not always spend your money for free".

If you try to empty your bank account at an ATM, the bank will not let that happen. And if you go abroad and make a large withdrawal there, the bank will block your account.

These scenarios show that a bank wants to guarantee the safety of your money. But it also makes it immediately clear that the bank knows everything about the transactions you do with your bank account. It constantly monitors these payments for suspicious transactions. They are in charge of your money.

It also shows that a bank can stop a payment if it appears that a "red flag" is going up somewhere. That in itself is a comforting thought. Your money is handled with care. Or so it seems.

However, the problem is a little deeper. The problem is that a bank can adopt a certain vision and thereby make decisions for you. It chooses to block payments to gambling websites or it closes the access of bank accounts related to the sex industry. These decisions are all based on ethical and moral arguments.

A recent example: Turkey is denying access to millions of bank accounts.

There are also banks that hold back transactions to exchanges such as Coinbase and Kraken. On this site you can keep track of how all the different banks view cryptocurrencies.

Conclusion: our banks therefore monitor every transaction. You are not in charge of the money that is in "your" account.

Bank money is (not) my money

The money is not yours once you deposit it in the bank. You assume that you can use it whenever you want. From a bank's point of view, it is a "liability", a responsibility.

If you put $ 1,000 in the bank, the bank owes you $ 1,000. In essence, your deposit at the end of the day is nothing more than a line in the ledger.

Where does the money go next? Well, the bank sees it as a "cheap source of cash reserves." It is the actual physical dollars they must own.

Legal requirements vary depending on the country. Currently, the limit for these reserves in the US is set at 10 percent of the bank's demand and checking deposits.

This is not really interesting at all for a bank. The real profit lies in the transaction costs and the loans. In 2018, British banks alone raised a total of 2.8 billion euros.

What does the bank do with "my money"?

A second aspect is (lending) money. This has everything to do with the complex concept of fractional reserve banking.

When Bob goes to a bank to get $ 10,000, the bank doesn't draw money from its own reserves to credit Bob. Instead of this logical step, something else is happening.

The amount written in the bank's log with Bob's name will be increased by $ 10,000 and 10% of the amount the bank received from the down payment will go to the reserve.

The rest of this can be used for a variety of other purposes, including financing other loans, enabling a circle of intertwined loans.

The confidence of the banking system continues to exist through the mandatory reserves. However, this is equivalent to a fraction (~ 10%) of the total loan amount. It basically means that if more than 10% of the balances are withdrawn simultaneously (through a so-called bank run), the bank will run out of money.

This is also called the Money Multiplier Effect. It comes down to 0.1 = 1.0 and that ensures that there is an infinite supply.

We take a step back to cryptocurrencies: the cool thing about Bitcoin is that 1 Bitcoin is always 1 Bitcoin. The supply is fixed, loans will always be "neat". Bitcoin's supply is transparent, but that of the banks is not.

On to the third question: "If you invest, where does your money go?"

Where will my money go?

An unambiguous answer is difficult to give, given that there is a wide range of options. The products are complex and lack transparency. Users also have little control and control over how their money is used.

For now it makes no sense to answer the question, but think about it: where does a bank put your savings?

In addition to the complexity and lack of transparency, banks face another major problem: the lack of control. Investors have no way of blacklisting an industry or a particular company.

And now? Banks and money?

The three questions asked made clear what the limitations of our current banking and money system are.

While some restrictions are in place as a need to protect users' assets, a critical note is good. The banks now do much more with our money than just keeping it safe.

The big problem is the business model. The profit that the banks make (and pass on to their shareholders) comes from the consumers. Mischa Tuffield described it very nicely:

"The problem with banks as we know it is that the profit is for few and the losses are socialized."

The task of the banks is much greater than just exchanging money. They have a say in freedom, property and free trade.

Bitcoin, Bitcoin and Bitcoin again

Actually it is very simple: buy bitcoin. Make sure you have your own money. Make a bank unnecessary. Also make sure that you have money that cannot be used for fractional reserve banking.

Also make sure that money that is yours cannot be taken if it suits a bank. Make sure you have money that has intrinsic value.

Make sure you rely on a decentralized network, rather than a "traditionally systematic inaccuracy." Make sure YOU are in charge of your money.

Bitcoin is money and flourishes in areas where money like the euro and dollars falls short. 

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MichDon
MichDon

Crypto entousiast, father, taekwondo


MichDon
MichDon

Crypto-enthousiast dad with an aim to try to inform readers of new and interesting projects, upgrades and updates to projects and of course any news of interest on the Crypto spectrum.

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