Power goes hand in hand with controlling money

Historically, governments have the biggest power in their countries. Countries usually have central banks and a lot of commercial banks. Central banks are responsible for monetary policy while commercial banks serve people and businesses. Governments and banks should be to some extent independent. There are always people in leadership positions of institutions and they naturally strive to have power. Within the last few decades, new influential players slowly appeared. Due to the internet and many technological advancements, big IT companies become very strong international entities. Companies like Google, Facebook, Twitter, Amazon, Alibaba, and many others are international and have more information about people than governments have. How did it happen? Well, the fact that the internet is a global network allowed locally successful companies to become global players quite fast. While the decision power of governments is mostly limited to their countries, big IT companies have begun to control literally the whole world. As you could probably hear, information is the gold of the new era. These companies know well how to commercialize information. Now, we are in a situation when social media are accused of influencing the election of the US president, they can legally censor tweets of politicians, or even try to create their own global currencies. Facebook still works on the Libra project and it is possible that we will see it in some form. We can observe a quiet struggle for power between governments, banks, and big IT companies.

The most important message from the previous paragraph is that technological advancement can blunt the power of governments and give advantages to owners of technologies. Cryptocurrencies can be perceived as a technological invention that stepped in into the struggle for power. In contrast to governments, banks, and big IT companies, cryptocurrencies are naturally decentralized. We stated in the beginning, that power goes hand in hand with controlling money. Does it mean that when we begin to use decentralized money then nobody will have power? No. Some people and entities will always struggle to usurp power. Thus, when they want to usurp power, they will need to somehow control cryptocurrencies. Banks are definitely entities that will struggle to control money regardless of whether it is fiat money, Central bank digital currency (CBDC), or cryptocurrencies. 

Are currently commercial banks really threatened by cryptocurrencies?

Let’s have a look at the current situation. The most adopted cryptocurrency is Bitcoin. Commercial banks decided to resell Bitcoin to big investors. It means that they have created cryptocurrency custody services. For banks, Bitcoin is just a new business and also investment opportunity. Is it good or bad? Both. It is great that big companies buy bitcoins as a hedge against printing money. The narrative about a new digital gold slowly becomes the reality and it can be expected that others will join the club. There is one negative aspect of that, though. Rich players buy bitcoins to ensure that they will stay rich. A very small group of early adopters that holds bitcoins or other cryptocurrencies now can maybe become rich as well. The negative aspect is that bitcoins will become very expensive for the majority of people on the planet if they are not expensive already. Thus, the majority will have basically no reason to join the club. People generally do not care about hedging. They do not buy gold since many of them do not understand the mechanics behind scarcity and demand in turbulent times. By some research, approximately only 15 % of the population in the USA holds gold. Gold is not a currency and it is not even used to back fiat currencies. In the case that Bitcoin will become a new publicly accepted digital gold, it can remain a digital hedge forever without the ability to become a stable global currency. It is actually difficult if not impossible to have a scarce resource and currency in one single asset. Let’s have a look into the past. The U.S. effectively abandoned the gold standard in 1933 as the Great Depression hit. Faced with mounting unemployment and spiraling deflation, the U.S. government found that it is unable to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the U.S. and other governments had to keep interest rates high, but that made it too expensive for people and businesses to borrow. So in 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold, allowing the government to pump money into the economy and lower interest rates. The United States followed the gold standard until August 15, 1971, when President Richard Nixon announced that the government would no longer convert dollars to gold at a fixed value. Thus the gold standard was completely abandoned. Some events require radical solutions and the U.S. was not probably a better chance to solve it differently. Currency needs to be stable and it is hard to predict whether the volatility of Bitcoin will be similarly stable as current currencies. We are rather skeptical for a variety of reasons. It is difficult to predict the future but one thing is certain. Cryptocurrencies will bring changes in society and it is already visible. Attempts to create CBDC are just a first step in searching for solutions to the current situation. Anyway, if you believe in the collapse of fiat currencies then you need to realize that the economies of many countries will be collapsing as well and all cryptocurrencies can be extremely volatile for a long time. Bitcoin, together with all other cryptocurrencies, is not able to solve the global economic collapse that would come within let’s say within 5 years. It is great to see that people and even big investors perceive Bitcoin as a hedge in bad times. On the other hand, there will come good times when it is smart to sell gold or bitcoins and invest money at the beginning of a new cycle. If you have a look at the past you will find that gold is volatile and respects economic cycles. It is very probable that Bitcoin will behave similarly in the future. 

Commercial banks are not threatened by the existence of gold so we can conclude that they are not threatened by Bitcoin as well. It is not going to change until the majority of people will start using alternatives to fiat currencies. Such an alternative must be stable. The business of commercial banks is about the currency that is used by the majority. A commercial bank can offer you many services like opening a standard or business account, opening a savings account, taking different types of loans (short-term, long-term, or business loans), you can insure yourself or your property. Cryptocurrency must be able to disrupt these services to compete with banks. The stability of currencies is simply the most important attribute of the current fiat currencies from the point of people. Other important attributes are the settlement time and transaction fees. People are used to paying by payment cards. It is fast and cheap. Moreover, paying by card provides higher privacy than Bitcoin. Merchants are not able to see how much payees have on their accounts. Currently, some people use payment cards that allow them to pay by crypto. In reality, however, fiat currencies are used. Card providers just offer a kind of custody service for users’ cryptocurrencies. Users basically pay by fiat currencies and the provider charges them later via slow crypto transactions. This, again, does not threaten banks. It is probable that they will offer similar crypto payment cards to people if it goes mainstream. So it is rather a new business opportunity for them. The advantage would be that it would be nice protection against printing money. On the other hand, decentralization would suffer a lot regarding the censorship-resistance ability and as we said, the major problem is the volatility. Cryptocurrencies will never succeed in competing with commercial banks if the same or better abilities like current currencies are not delivered. It would be nice to have money that does not suffer from inflation but it is a secondary requirement for the majority of people. Usage in the real-life will always be in the first place.

How can commercial banks be substituted realistically?

The reality is that commercial banks can only be threatened by the decisions of people. People must decide to close their accounts and do not use bank services. The change is not actually about banks but about people. It is necessary to have alternatives that would be able to substitute fiat currencies and bank services. Moreover, there must be significant and visible advantages that persuade people to use it. The only possible way is to create stable coins, scalable decentralized networks, global service for identity management, and allow people to make a contract.