Thank you for sharing this article with me. I agree that equity, leverage, liquidity, and duration are all important factors to consider in understanding the nature of money and financial systems.

In particular, I think that Bitcoin represents a unique and disruptive force in the world of finance precisely because it allows us to challenge the entrenched power structures that have contributed to the rise of fractional reserve banking and other similar practices.

By strengthening equity, removing the need for leverage, and increasing liquidity without sacrificing duration, Bitcoin presents a powerful new paradigm for currency that can truly bridge the gap between decentralized financial systems and the wider world of finance.

Ultimately, I believe that Bitcoin and other decentralized currency systems have the power to transform our understanding of money and finance from the ground up, ushering in a future where the power of money lies in the hands of the people, not in the control of centralized authorities.

“Bitcoin is so new and so interdisciplinary that it breaks established framings.”

“You thought banks dealt with ‘money’ when in fact they deal with capital of varying liquidities.”

“Money is (by definition) the most liquid asset, and yet is not productive. Productivity is only possible with illiquid, production capital. But this must be purchased with liquid, financial capital. The more capital intensive your business, or the higher returns you would ideally like to make, the longer the period over which you will have to commit to such an arrangement for it to bear fruit.”

“If the bank always has a large enough equity cushion to meet the calling of its short duration liabilities, then it is fulfilling its promises. If it can’t meet these calls, then it is not.”

“…if we acknowledge that the act of making loans is rife with economic uncertainty, dependent ultimately on the ability of the borrower to make a higher economic return than he pays in interest, then the idea of only making promises that can be fulfilled becomes obviously silly. Banking is a business. Businesses take risks. In particular, banking is in the asset management business, and it is certainly possible to manage assets poorly.”

“…in the event of an equity squeeze, the bank will seek short term funding (there’s liquidity and duration popping up as pertinent). Or it may seek to liquidate more long duration assets instead (ditto), or come up with ways to incentivise depositors to leave their money (extending the duration of liabilities in the bank’s favour).

The very nature of the equity cushion is that it is a function of leverage.”

“…I would say that FRB is not fraudulent to the exact extent that the business of banking is run successfully.”

“Everything the bank itself does has an equal effect on assets and non-equity liabilities… and leverage is simply the resultant ratio of assets to equity. Assets and liabilities can go up, down, and all around, meaning leverage can go anywhere, but net equity doesn’t change. Which means aggregate money doesn’t change one bit, either. The bank does not create money.”

“…this does not mean the bank doesn’t affect money. I was very careful just above to say ‘net’ equity and ‘aggregate’ money don’t change, because it is still entirely possible that the way people use money changes over short periods of time as a direct result of the bank’s actions, and hence it is perfectly fair to say that money changes.”

“…even though the ‘money’ is still there in aggregate, there is temporary confusion over the true liquidity of the aggregate of assets, and so the net equity is not being treated as equity, which has knock-on effects.”

“You can require banks to hold 100% reserves to satisfy your moral compunctions, but then you aren’t really talking about ‘banks’ any longer. You are talking about piggy banks. You can only complain about maturity transformation in the context of the lenders being unconsenting, but not in the context of asset management. Banking is asset management. Regular people should choose to opt in, for sure, but they can’t then also claim immunity from the consequences of poor management of their assets.”

“One of the many reasons Bitcoin is interesting as a monetary system is that its default state of possession and spending is not via a depository institution at all. The equivalent of hiding money under your mattress is entirely natural in Bitcoin, and so users do, in fact, have a choice as to whether to trust their money to an asset management business.”

“…open source and programmable money implies open source and programmable lending. Bitcoin has properties that no previous money has ever had and so I think it is reasonable to be excited by the potential for unlocking a long tail of previously infeasible finance, even if we have no idea what any of it will actually look like.”