The Rise of Bankless Consumers?
A representative of the Bank of England is concerned that the consumers may choose to adopt cryptocurrency and go bankless. What would happen if people were to bypass the traditional banking system and use cryptocurrency systems to store and move money?
Jon Cunliffe of the Bank of England thinks that it could have a considerable impact on the banking system. Specifically, he believes that it may have a substantial effect on credit within the system.
Let’s take a look at what he’s concerned about and why it may be a big deal.
Bankless Customers and BoE Concerns
Banking works like so, you earn money at your office job or elsewhere and get a paycheck. You take that paycheck and deposit into your bank account at one of the large banks. The more deposits, the better for the bank as it can show financial strength. Remember that deposits act as simple sources of funding for financial institutions, they can take on these deposits, pay around 0.01 on deposits, and lend them out at a higher rate.
That’s a simple business model, and it has worked out well for banks and businesses for quite some time now.
Consumers deposit, banks hold it, and businesses and others obtain loans, and everyone is relatively happy.
But then something else came about, something that banks didn’t account for, the rise of the cryptocurrency industry.
Cryptocurrency and the BoE
Banks didn’t account for systems such as Bitcoin, Ethereum, and companies such as Facebook with its Libra project to draw value disrupt the banking industry. If more consumers choose to deposit value into bitcoin, libra, and other stablecoins, this takes value out the traditional banking system.
Value is then held in places likes Coinbase or Binance instead of J.P. Morgan.
Reuters notes that “Cunliffe said it was possible that so-called stablecoins linked to big technology and social media platforms could lead to people moving much or all of their money away from bank accounts to virtual wallets provided by non-bank firms”.
Further, he notes “in such a world, and depending how and whether stablecoins were backed with other financial assets, the supply of credit to the real economy through the banking system could become weaker or indeed disappear,” he said. “That would be a change with profound economic consequences.”
Cunliffe is focused on stablecoins because they seem like they would gain the most adoption. He thinks or knows that they will find more traction because they will have the backing of technology giants. These technology corporations and partners will push for the integration and distribution of the stablecoins in the marketplace. For instance, if the Libra project works with partners such as Shopify, it can distribute a stablecoin to a slew of partners and consumers.
While we do have crypto lending with BlockFi and other firms,we’re still not seeing as much value being placed into these institutions. Although deposits are on the rise and will likely grow in the future. But even now, firms such as BlockFi take in crypto-assets and lend out dollars on those assets.
These borrowers use those dollars for home purchases and car purchases and credit card debt.
Remember, consumers are using crypto-collateral to obtain dollars to spend within the real economy.
Will stablecoins genuinely disrupt the credit system, or will banks adopt stablecoins and continue in some form or fashion and continue as usual? It seems that banks will continue as usual, and Cunliffe’s fears may be a bit over the top. People who deposit cash in their bank accounts do it for safety and simplicity.
Dollars, Yen, Euros, and other fiat currencies are all backed by their respective governments, and each of them has some form of insurance and protection. You don’t get the same protections with cryptocurrencies at the current moment.
Why would you move a large portion of your value to cryptocurrencies with all the risks involved?
I don’t see any significant moves from the general population in storing a majority of their hard-earned value in cryptocurrencies at the current moment. The adoption rate may change over the next five years but it still slow and steady as of now.