I am getting annoyed at the number of projects that claim to replace banks. These projects variously claim to be the banks of the future, or the future of banks. They claim that they will some day make banks obsolete. Or that blockchain technology will replace banks. Or whatever.
Almost none of these projects are really about banking, they are all about moving bank money around. And in order to have bank money to move around, you need banks. (I will not, in this article, deal with the issue why crypto-currencies are not, and cannot ever be, money, or even currencies in the proper meaning of the term.)
Imagine someone saying that by creating a network of super duper used car dealerships we will not need car manufacturers any more. We will just move used cars around so efficiently and at such low cost that car manufacturers will become obsolete. How realistic would that be?
Banks are the institutions that create money because of their high credit. In the context of the sikoba project, I tend to denote these institutions with “H” and not “B” just to avoid the bank connotation — the “H” stands for “high credit” by he way. Let‘s look at the brief description of the role of banks that has been published on the New Money Hub website, and is also included in the book “Money, Credit Conversion and the legacy of Mitchell-Innes”:
The role of banks
The importance of banks in our societies is obvious, and the main role of banks is precisely credit conversion, which is why banks are called “credit institutions.” By making loans, banks take the credit of individuals and companies and convert it into bank credit, or bank money, for a fee. That is the essential role of banks.
The reason we can speak of bank credit as being money is that, by definition, banks are institutions whose credit is money. Even though the credit of one bank may be valued differently than the credit of another, both are money. And when a bank’s credit declines so far that it is no longer money, then it ceases to be a bank.
Other institutions also have a money-equivalent credit, the most prominent of these, but by no means the only one, being the central government. Some of these institutions may even, to some greater or lesser degree, engage in credit conversion. However, the particularity of banks lies in the fact that credit conversion is their main business.
Of course, banks have always had other roles, such as wealth mangers, accountants and payment facilitators. Indeed, in some cases a so-called “private bank” may act almost exclusively as asset manager, with the only credit business being Lombard loans — and even that activity will often be subcontracted to a larger bank. For the sake of clarity, we will use the term “bank” only for institutions that actually engage in monetary credit conversion, independently of their actual denomination.
To summarise, banks are institutions whose credit is high enough to create money. It does not really matter whether we call them “banks” or “hics” (high credits) — what matters is the result. Mostly the money creation is done by what we call “monetary credit conversion” in the case of private institutions — when private or corporate credit is converted to bank credit, which is money. If it’s a public institution, such as a central government, the money creation can be done via direct issuance based on the credit of that government.
In the EU, a number of bank-like payment services operate under the umbrella of the “Payment Services Directive” from 2010. Their services resemble bank services, but they are not allowed to grant loans and cannot therefore create money. They can only facilitate transfers of existing money which was created by other banks. They are very useful, but nothing more than efficient APIs to the existing banking system. And putting a payment system on a blockchain does not make it a bank either.
Yes I would like more monetary diversity, and I am working on re-establishing IOU/credit systems via the sikoba project. But while doing that, it looks like one my tasks will be explaining to people the basics of money.