Banking practices demonstrate the appeal of cryptocurrency

5 December, 2019

Cryptocurrency, as a financial asset, exists on two planes. The first is that of holding cryptocurrencies as assets similar to stocks, bonds, and other traditional securities. The second plane of cryptocurrency is using it as an alternative monetary system in place of fiat or digital fiat payments. It is this second plane that doesn't make a lot of sense to people.

Your average consumer does not struggle with the idea of buying Bitcoin in hopes of turning a profit when the price goes up. Investing to make money is universally understood. What many people cannot wrap their brains around is why anyone would buy Bitcoin just to turn around and use it to buy something else.

At the core of this apparent dilemma is not really a misunderstanding of Bitcoin, it is a misunderstanding of banks and all that come with them. It is a misunderstanding of how governments and central banks use the current financial system to their own benefit while leaving the average consumer high and dry. When consumers really begin to understand how the banking system is stacked against them, cryptocurrency starts looking more attractive.

To illustrate this point, we will look at two recent banking sector decisions that demonstrate the appeal of cryptocurrency as a monetary system. One decision comes out of South Africa while the other is from Germany. Both will leave you wondering how banks remain in business given some of the stunts they pull.

Shutting out exchanges in South Africa

It is a given that cryptocurrency exchanges need access to traditional banking services in order to accommodate fiat payments. Normally this is not a problem. Commercial and retail banks tend to be more than happy to accommodate just about any business willing to make a deposit. But increasingly, exchanges are running into trouble. They certainly are in South Africa.

South Africa's First National Bank (FNB) recently started notifying its exchange clients that their bank accounts would be closed beginning spring 2020. The reason cited for the decision is the bank's "risk appetite". In other words, they consider cryptocurrency exchanges too risky for the rest of their portfolio. So out the exchanges go.

The bank's decision is not limited just to exchanges, though. Beginning March 2020, they will not offer banking services to any business that deals with or trades in digital currencies.

Regulatory concerns

The phrase 'risk appetite' doesn't mean a whole lot in retail and commercial banking operations. Risk appetite is more for investors looking to diversify their portfolios so as to minimize losses. When bank executives say they are assessing their risk appetite, it really means the bank has regulatory concerns. That appears to be the case with FNB.

How do we know? Because the letter the bank sent to its affected cryptocurrency customers specifically stated that "future regulatory clarity may cause us to revise our decision." The statement essentially admits that the bank isn't really concerned about the financial position of Bitcoin, Bitcoin Cash, etc. It is afraid of bringing trouble on itself as a result of serving an industry that government and central banks are not really in favor of.

It should be noted that FNB is not the only bank to make this decision. Nor is South Africa the only country in the world where banks are cutting out exchanges. Earlier in 2019, Barclays shut out Coinbase despite the exchange's stellar reputation and considerable assets.

The corruption angle

If regulation is the main issue, what are banks so afraid of? It often boils down to concerns of money-laundering. Whether legitimate or not, money-laundering and similar illicit activities are frequently cited by governments as reasons to crack down on cryptocurrency. Government leaders are insistent that Bitcoin and its alt coin counterparts are havens for illegal activity due to their censorship resistance and security features.

Banks are afraid that regulatory crackdowns aimed at rooting out illicit crypto activity will come back to bite them. The ironic thing is that there are plenty of commercial banks that are corrupt themselves. State banks in India are a good example.

According to BeInCrypto contributor Rahul N., state banks in India have been dumping crypto businesses for a while. Yet the banks themselves have been found guilty of engaging in fraudulent activity worth more than U.S. $14 billion - just in the last six months.

Any way you look at it, banks refusing to do business with crypto exchanges and other related businesses does no one any good. They are inhibiting the ability of legitimate businesses to do what they do. They are stifling entrepreneurship, making the cost of doing business more expensive, and demonstrating why their arbitrary decisions only help to fuel their poor reputations among consumers.

Customers paying for negative rates in Germany

Banks dumping cryptocurrency exchanges may not mean much to you as a casual crypto user. If so, this next story out of Germany might get your attention. The story is rooted in the question of what happens when a bank finds itself in negative interest rate territory.

In Germany, negative interest rates are an ongoing problem at retail banks. Negative interest rates occur when a bank decides to charge customers for holding their money rather than paying interest on said deposits. It is almost always the result of banks hoarding cash rather than lending it out.

Note that negative interest rates are a cascading phenomenon. A central bank might decide it wants commercial and retail banks to loan more money. In order to encourage them to do so, they charge those banks higher fees for storing their money with the central bank. The fees impact how much interest commercial and retail banks can pay. If their fees go too high, they may be unable to pay depositors interest. They might even be forced to charge depositors a fee as well.

As you can see, negative interest rates are an artificial creation of central bank monetary policy. Who ultimately pays the cost? Consumers. Even when central bank fees are not high enough to create a negative interest rate situation, they still limit the amount of interest commercial and retail banks can pay depositors. So while the central bank engages in punitive action in hopes of getting commercial retail banks to loan more, consumers pay for that punitive action.

Paying banks for the privilege

Let us talk about negative interest rates and what they mean in the real world. As a consumer, you deposit money at your local savings bank. The bank combines your money with the deposits of other customers with a goal of making money from it. How do they make money? By investing and loaning.

Some of the money banks get from depositors goes into investments. Banks can invest in anything from private equity funds to government bonds. The rest of the deposit money is loaned out. Banks make money on loans by collecting interest.

In essence, you and your fellow depositors are giving money to the bank. You are providing the 'raw materials' they use to make a profit. It used to be considered a privilege to have access to that money. Banks were appreciative that their customers gave them the resources they needed to generate revenue. But somewhere along the way, the idea of banks serving their customers went by the wayside.

Having access to customer deposits is no longer considered a privilege. Many banks look at it as a fundamental right. So in a negative interest rate scenario, you are actually paying the bank for the privilege of lending them money that they can make a profit from. Now the privilege is on you rather than them.

The appeal of cryptocurrency

Action taken by nearly 20% of German retail banks to pass on negative interest rates to customers has many of those customers fuming. It should. What is the point of having a bank account if your bank charges fee after fee for nothing more than storing your money?

This is the sort of thing that clearly demonstrates the appeal of cryptocurrency. Bitcoin, Litecoin, and all the rest are free from central-bank manipulation and local bank fees. They are free from arbitrary decisions made by bureaucrats and business executives whose only objective is to advance their own interests.

In a cryptocurrency scenario, no board room full of bankers can choose to arbitrarily assess a negative interest rate on your money. In a cryptocurrency scenario, you are not storing your digital assets with a bank that is subject to central-bank manipulation. You control your own assets by storing them in your own digital wallet.

The main take-away here is that banks are capable of making arbitrary decisions that cause unnecessary problems for customers. Some of those problems are as complicated as having to find a new bank because your old bank has refused to provide service. Other problems cost customers real money. None of them are acceptable.

Cryptocurrency is appealing as a monetary system because it takes banks out of the equation. As the thinking goes, there is no point in giving banks our money when those same institutions don't care a whole lot about whether our money works for us. We are better off taking matters into our own hands and doing business with crypto.