I often return to a theme: where’s my guarantee? Where’s my backup? After the failure of Silicon Valley Bank and Signature Bank during the past week, it begs the question: where’s my guarantee? Where’s my backup? After losing money on MtGox ten years ago: where’s my guarantee? Where’s my backup? With the failure of FTX and Terra-Luna: where’s my guarantee? Where’s my backup?
This is the core of why banks need licenses and regulations.
I love the idea of financial services being regulated by the network of citizens, but I constantly come back to the core tenet of money: who is behind this money? Who do I trust?
Many people have criticised me over the past decade for saying you cannot have money without government, but I never defined the government as being Parliament or the US Federal Reserve. What I mean by government is an oversight I can trust. It could just as easily be an eBay or Google as the US Federal Reserve, but there is a difference.
First, why would I trust something that does not guarantee my money? Banks with licenses under the Federal Reserve or European Central Bank guarantee your money is safe, within limits ($250,000 under the FDIC in the USA or €100,000 in Eurozone). Without a banking license, they can just walk away and leave me high and dry (and there are plenty of those schemes out there).
Second, most banks with licenses will have government backing if they need bailing out, as demonstrated by the failure of Silicon Valley Bank this week. The core of this is that banks backed by governments with licenses are capitalised, guaranteed and trusted. With no guarantees, they may as well be gangsters (and many are).
It makes me sit back with some schadenfreude.
I’m not happy about the failure of banks, especially those at the heart of FinTech innovation, but I do come back to my core argument with the Libertarians: you need to be a bank to be bank and, to be bank, you need to have a license issued by a trust authority.
This is a big friction, as the libertarians challenge: who is the regulated authority? I don’t know.
Of course it could be the decentralised financial network, but what is that? Is it a voting system of trust? Whose votes do you trust? This is the reason why, more often than not, folks trust governments. The trusted authority is the national government. The reason why the national government is trusted is that, wherever you live, you typically have only two certainties: death and taxes.
I know that I will die one day. That is a fact. Equally, I know that I have to pay money to some authority (the government) to avoid being jailed. That is a fact.
Death and taxes.
These are the two basics of life.
So, going back to the point, can you have money without government? I don’t think so.
As we see the markets implosion on the back of two licensed banks – Silicon Valley Bank and Signature Bank – we can rest easy because they can at least guarantee our deposits to the tune of $250,000 under the FDIC Scheme. Without such a license or such a scheme, you might as well be completely messed.
Oh, and on that latter note, that’s how most people feel today in the crypto-world. Completely messed. They have no backup, no regulator and no licence. Isn’t that funny? If you have no regulator and no governance … oh! It’s just a mess!
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...