A stable coin could replace retail banking

Banks exist to provide 3 main services

• manage wealth
• provide credit
• keep your money safe
• allow for easy and secure transfers

Arguably banks do a bit more but in any case, I will concentrate on the last two functions and what blockchains could do to improve today’s situation.

Retail bank’s role

The main function of a retail bank is to loan money cheaply from their customers and lend it to other customers for a premium. But many banks do not fulfill this function anymore. They lend for mortgages and they lend to established companies, but not to individuals or small companies.

The other function is to steer the money supply. For every € a bank borrows from a customer it can lend 10. This is one of the reasons banks love mortgages. The leverage they have is that a 2% loan provides much better returns when you earn interest on 1'000'000 but you only have to pay interest on 100'000.

Safekeeping of funds

Crypto assets have proven very secure over their short lifespan. The difficulty lies with managing the keys and not losing access to funds, but everyone agrees that the cryptography protecting tokens is strong and solid.

The main problem with crypto assets today is volatility. Hence the need for a stable coin. Ideally a central-bank backed stable coin.

What about returns? A savings account does provide some returns after all, even if meagre. There are products emerging which allow owners of capital to get returns and benefit from insurance. This is something that does not require the state. As the competition intensifies, the conditions will improve for capital owners.

Easy and secure transfers

Transferring tokens is what the whole blockchain technology has been created for. Literally. It comes as no surprise that this function is embedded in any blockchain implementation.

It is arguably easier to transfer a crypto token than to make a bank transfer. If widely adopted, it could replace debit cards without breaking a sweat and credit cards would simply be lines of credit on your crypto wallet.

There are already providers for this service and the competition will get fierce in the near future.

What about Transactions per Second (TpS)?

TpS is a big issue today with Bitcoin and Ethereum, the two best known blockchains. But there are technical solutions for this. Stellar can do 3K TpS today and with a hub and spoke design supported by technologies such as Cosmos or Polkadot, there is virtually no limit.

I’m confident that TpS will not be the highest hurdle to jump.

What needs to happen for retail banks to disappear?

For the banks to go out of business, laws need to change, which is unlikely in any country. But for the retail part to migrate to crypto, actually not that much.

The parts that could migrate

The current accounts and savings accounts could easily migrate to crypto. Banks might actually be happy about this as they would not need to manage accounts with small balances and, more importantly, no contributions to insurance schemes.

What remains in bank’s coffers?

Mortgages are the only part of retail which will probably remain a bank business. But this is fine as there is no insurance required to protect the customer. The risk is borne by the bank.

The effects on banks

If the disappearance of a bank does not impact any retail customer the need for national guarantees on bank deposits would vanish. That is probably the only effect.

Banks would still be instrumental in providing credit to grease the workings of the financial system. They would still be too big to fail as a financing freeze would still be devastating for the economy.

My hope is that, in time, the privilege to mint money will be embedded in a smart-contract and anyone abiding by the rules will be able to provide the same services. There will be no need for lengthy regulatory approval processes as a smart-contract can ensure that the players do not cheat.

But that is a long way off.