The Problems with Centralized Money
While the earliest forms of money – such as seashells, precious metals and gold – were owned and controlled by individuals, money today is controlled almost exclusively by governments and banks.
In the United States, the system is dominated by three entities:
Treasury: The Department of the Treasury is responsible for printing physical currency (i.e. notes and coins) and distributing it to Federal Reserve banks and branches
Federal Reserve: The Fed is the “banks’ bank” – it controls the overall money supply and distributes money to commercial banks
Commercial Banks: Institutions such as Bank of America, Chase and Wells Fargo put currency into circulation by lending directly to consumers
The Federal Reserve and Banking System
This centralized ownership presents five major problems:
Third-Party Custody: In the current financial system, you don’t really hold your funds – the banks do. This means that they can freeze and even seize your assets at will. While this may seem far-fetched, consider that in 2013, the Government of Cyprus seized 47.5% of all bank accounts over €100,000 to bail-out its failing banking system.
Limited Access: Banks can decide whether they want you as a customer. While generally not a problem in the developed world, this is a huge issue in growing economies. Today, nearly 1.7 billion people remain unbanked simply because they aren’t profitable enough to be considered by global financial institutions
No Privacy: Banks must collect detailed personal information to adhere to KYC, AML and CFT regulations and transactions
Expensive and Inefficient: The current financial system is rife with inefficiencies and unnecessary expenses. Payment networks charge up to 3% on credit card fees, cross-border remittance payments can take up to a week and cost 10%, and even in developed nations, users are faced with long transfer times and bloated fees.
Restrictions of Transfer: Several countries restrict or even ban the transfer of large amounts of cash internationally
So why do we tolerate these inefficiencies? Well, we don’t really have a choice due to what is known as the Byzantine General’s Problem. While I’m oversimplifying a bit, this concept basically states that large groups of humans can’t trust one another or coordinate across vast distances without using third parties (such as banks) to establish trust. For example, when a stranger sends you money online, you must rely on your bank to ensure that 1) they are whom they say they are and 2) they have the money they say they have and 3) they actually send it.
In short, while some may call the banking system “evil”, up until now it has been a “necessary evil”.
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