Bitcoin cannot replace the banks – Financial Times

Bitcoin cannot replace the banks – Financial Times

For several hours on Wednesday, the digital services the US Federal Reserve uses to clear transfers between banks were offline due to an “operational error”. Bitcoin holders crowed about the reliability of their payments network, distributed among all the computers mining coins. Zac Prince, chief executive of BlockFi, a crypto lending company, showed more restraint, pointing out on Twitter merely that payments over crypto “continue to operate normally”.

One argument in favour of buying and holding bitcoin is that cryptocurrencies will eventually replace banks themselves, as their services for storing and transferring money will no longer be needed. This will, in turn, make bitcoins so valuable that they will replace “dirty” dollars as currency, leaving those with bitcoin in possession of the only real money.

Holding any asset in the hope that it becomes money is, to be sure, a long-term investment strategy. But it also shows a flawed understanding of how dollars work, and who creates them now. Most of what currently functions as money in the US and any developed economy does not come from the government. It comes from commercial banks. Banks do not just hold money, or transfer it. They create it.

Misunderstanding over this is widespread enough that in 2014 the Bank of England put out a paper, Money creation in the modern economy, to clear things up. University textbooks teach that banks take in deposits, then lend them out. This is
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