01 Our financial and monetary institutions systematically deepen economic inequality
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The current financial system has some negative, but largely unknown, aspects that need to be exposed. If we don't know that even well-functioning economies may (and often are) overwhelmed by unsound monetary policy, we cannot recognize the power of Bitcoin .
We tend to put Bitcoin at the edge and treat it as an alternative payment system or currency, believing that Bitcoin is only suitable for economies that are in trouble or unable to provide adequate banking services.
In this article, we will explore the financial processes that have eroded our wealth, which will gradually affect the entire economy and affect millions of people. This is why you and my personal wealth are gradually decreasing but not immediately noticed, and this process is often not done overnight.
For every individual, this erosion is usually not enough to cause an uproar, but when millions of individuals in an economy are added together, the situation is quite different.
As the inflation rate rises, this hidden wealth redistribution becomes more pronounced and the inflation rate does not have to be high (relative to historical interest rates). The hyperinflation scenario in Venezuela or Zimbabwe is not only an extreme example of this situation, but it also proves how much wasteful government spending and unreasonable monetary decisions can hurt people's economies.
Even in advanced economies characterized by moderate economic growth, low interest rates and seemingly harmless inflation, people's wealth and savings are systematically redistributed to repay government debt. And this happened so secretly that the voters did not notice that the government’s arbitrary spending had little political consequences .
In most countries, people entrust their money, savings, and economic benefits to large financial institutions and central banks. It is believed that their country's strong regulatory environment will support their security (or even growth) in wealth.
However, regulations aimed at protecting the integrity of the banking system have also created conditions of money supply, inflation and interest rates, allowing wealth to be quietly transferred from private depositors to public sector debtors . So, the next time you think that the topic of inflation and government debt/waste is boring enough to make you worry, think about whether this is really the case.
- The cost of remittance from abroad to your own country is too high;
- Our personal or corporate loan rates are high;
- Excessive payment fees, whether credit card payments or multinational company payments;
- Limit how much overseas funds we can invest in;
- When asset managers, brokers or exchanges prosper, our portfolio value is shrinking.
However, the depth of the rabbit hole is much more than that. The structure of our financial system and regulatory framework is such that capital and wealth generated from it will unwittingly repay through the banking system, from savers to financial institutions and government debt .
More importantly, the scale of this happening is shocking. This article will provide a fact-based overview of how all of this happens, hoping to “open your horizons”, let you recognize these realities, and motivate you to come up with better alternatives that have always been seen as Normal practice.
In this article we will focus on the following topics:
- Consumers are suffering from the impact of today's financial institutions' heavy cost structure;
- The benefits that financial institutions receive from their clients' funds are far more than what customers get from them;
- Even in well-functioning developed economies, wealth is redistributed from the poor to the rich.
This article will begin with the more common financial service “pain” because we are used to these “pain syndromes” and are no longer sensitive.
After that, we will explore how the monetary institutions and systems we trust every day promote the implicit transfer of wealth from the poor to the rich. All of these issues and challenges will provide the foundation for why we need a better monetary system.
02 Financial institutions are costly machines
For example, in order to allow you to make simple credit card payments at your favorite store, there are some companies that offer point-of-sale devices ( POS machines ) that accept credit card payments, and the bank where the store is opened (the merchant's contract line ) , a credit card network (such as Visa, Mastercard, or Amex, etc.) used to transfer your payment authorization request to your card-issuing bank, and the issuing bank that ultimately transfers your funds from your account (the bank where you opened the account) At the same time, there is a central bank that ensures that the payment obligations between the merchant's contracting bank and your card-issuing bank are liquidated and settled.
This is not a very detailed list, but it is easy to see how all of these participants and their own costs will affect the total cost of processing a simple payment .
Inevitably, we feel the impact of these challenges in our daily lives, as reflected in bank fees, insurance premiums, and a decline in savings or return on investment .
Moreover, in addition to the presence of multiple participants, each of which adds cost/cost to the portion of their service offering, many other factors add to the cost burden that is inevitably borne by the consumer .
- Regional branch network, each branch bears expenses for its staff, business premises, cash management, etc.;
- Regional ATM network, including maintenance, cash replenishment, cash transportation and security;
- Most banks have aging traditional IT systems, many of which are dedicated to maintaining and continually enhancing the system;
- Tens of thousands or even hundreds of thousands of highly paid employees;
- Financial services executives are usually paid very high;
- Other expenses.
In short, the operating costs of traditional financial institutions are extremely high, and these costs need to be recovered through fees, insurance premiums, interest payments, etc., incurred by consumers .
In addition to the high operating costs of financial institutions, the fact that their systems are not well integrated has increased their costs. For example, the lack of a standardized and integrated system is one of the reasons for the following:
- It may take several days for the payment to the payee to reach their bank account;
- If you don't have an intermediary or broker to manually organize it for you, you won't be able to view all of your investments and policies in different organizations. Of course, you need to pay for the services provided by these intermediaries.
Cross-border payments are just one big use case for Bitcoin technology to work . In 2018, global cross-border remittances totaled $689 billion . Current global cross-border remittance costs remain high , with an average cost of $200 for cross-border remittances of approximately 7% (of which banks have the highest cross-border remittance costs, averaging 11%). More details on remittance fees can be found through this link .
The value of cross-border payments is also increasing significantly. In 2018, cross-border companies paid more than $21 trillion. On average, a fee of $30-40 per payment, plus an average 2% currency spread, makes multinational/B2B payments a scent of financial institutions.
When corporate finance personnel rely on the receiving bank to process currency conversions, the transparency of exchange rates and conversion fees for both the payer and the payee in a B2B (business-to-business) transaction may be limited. Cross-border payments will not be settled in real time, and it is not uncommon for settlement time to exceed 5 days.
However, for corporate finance staff, the greater concern is that when funds flow through the proxy banking system, neither the payer nor the payee can effectively track the progress of the funds .
Let us take the return on investment of a pension fund as an example. Behind the scenes, there are several parties involved in managing your retirement fund, each of whom charges for the services they provide:
- Retirement Fund Manager – Manager assists in transferring a portion of your monthly salary deduction to different asset management companies that will manage (and hopefully grow) your funds, manage your claims expenses, etc.
- Asset managers – they invest your monthly investments in specific stocks and other instruments, usually based on some form of investment strategy. In addition to normal asset management fees, if the performance of the portfolio exceeds a certain benchmark (investors have little understanding of the benchmark), they may also charge a performance fee.
- Multi-managers – multi-managers manage your investment by managing basic investment managers, each of whom manages certain parts of your investment, and then charge you for this service. cost;
- Platform Providers – These providers have systems and business operations that provide more investment options to more savvy pension fund members. These platforms also charge for this.
- Employee Benefit Brokers – Their responsibility is to help your employer arrange retirement benefits for you, communicate with executives, and help educate you (employees) how to better increase your retirement savings and more.
- Asset Advisors – These consultants typically advise investment strategies on independently operating pension funds and charge for this consultancy service.
Of course, there are other entities, such as exchanges that actually buy and sell securities. The costs associated with these transactions are passed on to investors. Today, in the 21st century, opaque and excessive investment costs remain a huge problem .
03 Financial institutions receive far more benefits from their clients’ funds than customers get from them.
But our society has become insensitive to the unfair distribution of income between ordinary consumers and financial professionals, so that we no longer question the extent of the latter's profiteering . such as:
In the United States, an asset management company that manages a portfolio of individuals (and even pension funds) will receive a fee equivalent to 1% of the assets being managed, regardless of whether the client's portfolio value is reduced. This is to show how the income of ordinary investors is linked to market trends, while the income of asset management companies has nothing to do with market trends (at least not in the short term, but long-term sustained market performance will lead to asset management companies losing business) one example.
04 Unintended consequences of these high cost structures
Or, to put it more simply, some people are not able to get the services of some fund managers unless they have some minimum amount that can be used for investment.
Therefore, those who are less affluent have limited investment options and cannot enjoy the same advantages as the rich, but usually only get simple investment products, such as:
- Investing in a collective investment plan – although the funds in the collective investment plan are brought together, the different charging items involved still have a significant impact on the return on investment;
We believe that these things are too far away from our daily lives, far beyond the scope that affects us, and we “will not” be bothered by it.
However, the impact of government debt and inflation on us is so profound that it has even changed our lives, but people are less concerned about it.
Those who have had the privilege of not suffering from inflation often regard the 2008 economic crisis, the hyper-inflationary inflation in countries such as Zimbabwe and Venezuela, as a very rare event.
Therefore, those of us who have a successful career in a “functioning economy” do not realize or recognize the influence of our monetary system defects and how government debt, interest rates, and inflation targeting systems are managed.
But every day, an economic phenomenon called financial repression is even taking place in advanced economies .
Financial repression is the worst form of financial oppression because it redistributes wealth from the poor to the rich and the government that may be wasted in the most unobtrusive way. It takes advantage of the regulatory and economic policies that are based on prudential supervision, and does not affix the label of financial repression.
Financial repression has been widely studied and documented, but it has rarely been mentioned since the end of the "financial suppression era" in the 1980s. It has been largely forgotten that the prevailing financial restraint system decades ago (1945-1980) played an important role in reducing the huge amount of national debt that many developed countries accumulated during the Second World War. By subtly shifting wealth from citizens and savers to the repayment of government debt, government debt can be reduced without political consequences.
Financial repression is achieved through a number of regulatory tools used by the government (and still in use) that repay debt through private sector savings (such as retirement/pension funds and other personal savings).
In addition, policy and regulatory tools ensure that most of these savings are used for financing government debt, rather than for other sources such as precious metals or overseas investments .
Quite simply, the government will borrow from the central bank at a relatively low interest rate to raise funds for its business (military, medical, education, etc.). The central bank will provide these loans by borrowing from banks at the same low interest rates.
To this end, banks will minimize the impact of low interest rates on the central bank by paying less or no interest to bank account holders (storage depositors). The end result is that the central bank and its member banks escape and pass the cost of these government loans to bank customers.
In addition, regulatory tools will ensure that most of the private sector's savings continue to flow to government debt, rather than other more profitable investment channels.
For example, under US law, many pension funds can only invest a limited amount overseas. Pension fund regulations generally limit the amount of investment invested in a particular asset class, but generally do not limit the amount of investment invested in government bonds. Through this link  we can view the 2017 global pension fund supervision survey report.
Repayment of government debt with private savings can be achieved through the following policies and regulatory tools:
- Clear government regulation – such as the US “Q Regulations” prohibiting banks from paying interest on demand deposits and setting interest rate caps on savings deposits;
- The central bank's interest rate target (usually when the central bank's independence is limited or not independent, the central bank's interest rate target will be set according to the instructions of the Ministry of Finance).
Create or maintain a controlled domestic market for government bonds by requiring banks to hold government bonds through capital adequacy or to ban or suppress other options. Among the measures are:
- “prudent” regulatory measures require institutions to hold government debt in their portfolios (the pension fund has always been the main target);
- Stock trading taxes also guide investors to buy government bonds;
- Gold trading is prohibited.
The government also restricts the transfer of legal assets abroad by implementing capital controls.
Including stable inflation, these tools also help to transfer wealth from savers to reduce the government's debt burden.
Negative interest rates have greatly reduced the government debt burden because:
- Compared with other interest rates on the market, government loan repayment rates are very low. And beyond that,
Over time, the way in which taxes can be repaid by the government can be drastically reduced. Negative interest rates reduce the real value of government debt, but they also reduce the actual value of personal savings.
These policy instruments force savers to participate in this economic environment, minimizing their ability to invest in other anti-inflation channels such as commodities or overseas investments.
Financial repression is sometimes referred to as invisible tax.
The above policy tools create a compulsory, regulatory-driven monopoly market in which individual savings are combined in a very complex and secretive way by combining low interest rates on government loans with higher inflation rates. It has led to the direction of reducing government debt .
Ordinary people may never understand how this approach works, or even what these are happening.
During the financial repression period, huge amounts of wealth were redistributed from depositors and there was little political consequence.
For example, the interest-related ban in the US Q Regulations has been abolished, and restrictions on the purchase of precious metals have largely disappeared. However, restrictions on overseas investment still exist today in many countries .
Financial institutions such as insurance companies and banks are motivated or even forced to hold a certain number of low-yield government bonds. In many cases, banks are subsidizing the liquidation of government debt by being forced to hold government bonds with interest rates below inflation. However, banks can circumvent the negative impact on their earnings statements by :
- Use the customer's deposits in the bank/checking account to make loans to the public at rates well above government bonds;
- Pay little or no interest to the checking account customer.
Banks can generate interest income from loans (using client funds) or (using client funds) to invest in high-return assets, which generate revenue not only to pay off government debt, but also to make a profit for the bank .
In the United States, if money exists in a bank account that does not generate interest, the money will depreciate because of inflation.
If you deposit funds into a risk-free notice account, you can only enjoy a moderate interest rate, and if the real interest rate (that is, the real interest rate of the depositor or investor after receiving the inflation rate) is negative, the currency Value will also be eroded by inflation.
For example, investors continue to invest in stocks to pursue returns above inflation. But even if you have already received a return above the inflation level, your return may have to pay a capital gains tax, which will immediately reduce your net return to some extent.
To give you an idea of how widespread financial repression affects a country, let us take the United States and the United Kingdom as examples. During the economic depression of the 1980s, the two economies cleared the government's debt on average by only 3-4% of GDP. In 1980, the US GDP was about 2.86 trillion US dollars, of which 4% was about 114 billion US dollars.
When it comes to stimulating the economy by maintaining a healthy inflation rate (such as 2%), by lowering interest rates, the central bank has initiated specific measures needed to liquidate government debt. Specifically, it is low interest rate + moderate inflation rate . The 2% inflation rate seems harmless, but its impact will increase over time.
For example, a $1,000 investment, assuming a 20-year return of 5%, would be worth about $2,650 after 20 years. However, a 2% inflation rate actually reduces the actual value of the investment by 32% to around $1,800.
06 Why do we need Bitcoin?
Given our daily experience with currency, the unique characteristics of Bitcoin are counter-intuitive to most of us: Bitcoin is a currency without borders , it is a programmable currency; this currency cannot be government Confiscated or seized; this currency goes beyond any regulatory and legal framework designed by humans to date; it is not subject to jurisdiction or national boundaries and is not subject to foreign exchange regulation.
The Bitcoin Payment Network provides a system for the sender and recipient of the currency without trust , without the need for a bank or regulatory agency. The payment network is not owned or controlled by any agency or legal entity. There is no legal entity that can turn off Bitcoin.
Bitcoin is the most significant advancement in computer science since the advent of the Internet.
In the following, we will show how Bitcoin is not affected by the deficiencies of the traditional monetary system and how it benefits the society. It will also explore why Bitcoin is so revolutionary and presents an “unstoppable” trend. But the negative arguments for Bitcoin (such as power consumption, bitcoin volatility or "slow trading speed") will not be discussed in this article.
As mentioned above, global commerce and transactions have relied on many different interdependent financial institutions (central banks, banks, correspondent banks, etc.), credit card companies, payment processing agencies, SWIFT, etc., all of which are dealing with them. The role played during the payment process charges the user .
In addition to the complexity and cost involved, successful businesses also need to trust:
- A successful business requires the trust of the bank and the central bank (which is why it is necessary to supervise large institutions to generate this trust);
- In fact, the essence of the payment system is this: from the payer to the payee, and all payment intermediaries in between, need to be trusted . To ensure this trust, various controls, such as KYC (know your customer), AML (anti-money laundering), ID&V (identification and verification), etc., are required to implement the payment.
The Bitcoin Payment Network is the first attempt in the world to successfully create a peer-to-peer currency transfer, where:
- No intermediary or financial institution is required ;
- You don't need to trust any individual or organization to ensure a successful payment .
The Bitcoin payment system provides a way to trust, anyone can make a payment without knowing or trusting anyone else on the system, or without a central authority to provide the necessary trust.
In the process, it reduces the cost of the transaction. It allows anyone to participate. It does not require you to provide KYC documents, does not require you to pay for your account on a monthly basis, nor does it require you to meet the age required by the bank.
2. The total supply of Bitcoin is limited to 21 million pieces
Unlike the legal currency that the central bank or the Ministry of Finance can “print” or “not print”, the supply of bitcoin is fixed and immutable and is not affected by government authorities. This is different from other cryptocurrencies, where the supply of other cryptocurrencies (and even inflation) is affected by the individual.
Therefore, Bitcoin solves the inflation problem. Bitcoin is a digital asset that is anti-inflation and an unreplicable asset . All digital products we know (a song, a photo or an email) can be copied. Bitcoin cannot be copied. When you email someone, you still keep a copy. This is not the case with Bitcoin. When you send Bitcoin to someone, you no longer have a "copy" of it.
3. Bitcoin is a brand new payment system
Bitcoin is not a payment version that we are already familiar with (PayPal, Zapper, etc.), nor is it a payment system built on an existing payment infrastructure such as a bank, SWIFT or credit card network. Bitcoin does not need or need to be connected to any banking system to operate .
This makes it fundamentally different from solutions such as Ripple, Libra or central bank digital currency. Ripple still needs to interface with existing banking infrastructure that is outdated, unintegrated, costly and difficult to innovate on.
With the Bitcoin network, payment applications can be built without being restricted by these traditional systems or requiring modifications.
4. Bitcoin is borderless
Bitcoin has no geographic restrictions. Bitcoin exists in the blockchain, a global, decentralized, unregulated distributed database.
Therefore, Bitcoin is not supported by specific governments or regulatory agencies. It is not affected by foreign exchange restrictions imposed by regulators. Bitcoin provides users with an exit from the “monopoly market” that is enforced by the state's regulatory requirements (such as the financial repression discussed above) . And the regulatory restrictions on offshore investable amounts no longer apply to Bitcoin.
To answer these questions, we first need to review the nature of the Bitcoin blockchain and Bitcoin transactions. Then we can justify the economic and geopolitical impact of this new currency.
1. Bitcoin exists outside our national borders and jurisdictions
As noted earlier, Bitcoin has no geographic restrictions. Bitcoin lives on the blockchain, which is a global, decentralized, unregulated distributed ledger. Your bitcoin is already "everywhere."
2. There is actually no bitcoin in your wallet!
Bitcoin wallet software gives the impression that Bitcoin is sent from one wallet to another, but Bitcoin actually transfers from one transaction to another, and these transactions are stored on a global blockchain. . The bitcoin in each transaction is the bitcoin that has been received in the previous (or multiple) transaction.
Therefore, the input to a transaction is the output of the previous transaction. Only those with the correct public/private key pair can unlock the exported bitcoin and continue to use it.
Also, even if your wallet gives you the impression that you have a certain amount of bitcoin on your mobile device or hardware wallet, there is actually no such bitcoin in your wallet. The only encryption key stored in your wallet allows you to use a certain amount of bitcoin that is locked and stored on the blockchain.
Therefore, when you travel between countries with your hardware wallet, you don't actually carry "bitcoin" across national borders .
3. There is no such thing as "send bitcoin to someone"
Technically, in the world of Bitcoin, there is no such thing as actually moving Bitcoin. When you travel to another country with your hardware wallet, the unused transaction (UTXO) you own is already "out there", or it's 'ubiquitous' . Therefore, Bitcoin is always global,
When you trade with another recipient or "send" Bitcoin, all you do is change the ownership of a certain amount of Bitcoin in the global network (this process is verified by the entire network) . Bitcoin itself does not actually have any physical movement.
Therefore, all legal and legal frameworks for legal currency transfers (such as the legal framework for legal currency transfer operators) cannot regulate Bitcoin because Bitcoin does not have a traditional transfer!
4. The transmission of Bitcoin transactions can be carried out outside the Bitcoin network.
Bitcoin is a form of currency that is completely independent of the underlying transmission medium. Bitcoin transactions are digitally signed data structures that can be transmitted over different transport layers or communication media (such as e-mail, SMS or Facebook), not just bitcoin payment networks.
All the bitcoin transactions need to do is be packaged by the miners in some way and eventually included in a block.
The security of Bitcoin transactions comes from the user's ownership of the public/private key and the proof of work consensus mechanism.
In contrast, through the credit card transaction of the POS device, your actual credit card details (card number, expiration date, CVV code, etc.) are transmitted through the device and all intermediaries until it reaches the issuing bank for authorization.
These credit card information is very sensitive and if the information is intercepted and decrypted in some way, the credit card holder's account will be compromised. The rigorous PCI DSS (Payment Card Industry Data Security Standard) implementation is designed to minimize this risk, but the point is that, unlike Bitcoin transactions, the data you transmit to the issuing bank is sensitive .
Credit card information is also stored at each endpoint of the payment chain. We have seen many examples of credit card information being leaked. This is not always due to the fault of the participants in the payment chain, but it may also be because a sufficiently motivated hacker or criminal will eventually find a way to get the credit card information. Your credit card data is actually the access code for your account.
Bitcoin transactions are completely different. The transaction being transmitted is not an "access code" but a digitally signed message. Bitcoin transactions are actually authorizing who can use the unused transaction output (UTXO) on the blockchain . Bitcoin transactions do not contain sensitive data. If you intercept the deal, all you know is the address from which the bitcoin comes from, which address can be spent on the bitcoin, and how much it can cost. The signature will not reveal any information and the address will not reveal any information.
Even if you intercept the transaction, you cannot modify the transaction because every part of the transaction is included in the signature (although technically, Bitcoin allows parties to the smart contract to modify certain parts of the transaction using the SIGHASH flag and the ANYONECANPAY modifier. ).
Therefore, bitcoin transactions can be transmitted over any communication medium. Anything in a digitally signed message cannot be destroyed. We only need to get the message to reach a node in the Bitcoin network. From there, it will be broadcast to other nodes and verified by the network.
5. Bitcoin transactions can be converted to any message type
Bitcoin trading is a data structure. Therefore, transactions can be encoded into different formats .
For example, a bitcoin transaction can be encoded into a picture that is emailed to the recipient (or posted on a web page for the recipient to access). The recipient only needs to decode the file format to get the original transaction and inject the transaction into the bitcoin network for the miner to confirm.
Bitcoin transactions can even be hidden in the image and sent to the recipient via any convenient communication tool.
Therefore, Bitcoin is such a currency, and its "transmission" is no different from the transmission of data . Today, we have too many interconnected communication mechanisms and social media that prevent any authority from blocking the transmission of Bitcoin transactions. The same is true for underdeveloped economies that lack Internet connectivity but can use radio or SMS/GSM.
Of course, when Bitcoin needs to be in contact with the legal currency (such as on a cryptocurrency exchange), regulation is almost certainly achievable. Cryptographic exchanges can be regulated and they can be legally closed. But it is the interface between Bitcoin and French currency that is regulated or closed, not Bitcoin itself.
The Bitcoin network has not been interrupted for the past 10 years. It is the most secure encryption network ever. Developers continue to enhance the network and build a Layer 2 expansion solution based on the blockchain. Bitcoin itself has a good track record and credibility, which in the long run should make it sustainable.
: https://www.worldbank.org/en/news/press-release/2018/04/19/financial-inclusion-on-the-rise-but-gaps-remain-global-findex-database- Shows?
Author | Irlon Terblanche
Compile | Jhonny