PSA: There Are No ‘Bank Runs’ in Bitcoin… And No Banks
Social media lit up yesterday after a report that European Union countries will consider new laws allowing them to suspend bank withdrawals, to prevent “bank runs”. We’d like to take this opportunity to remind you that, if you hold Bitcoin the right way, it’s always yours.
On the surface, the E.U. proposition is completely rational. Bank runs — where depositors rush to withdraw physical cash on rumors their bank is about to fail — can be catastrophic.
Often they become a self-fulfilling prophesy. All the money is gone whether the rumors were true or not, and most depositors won’t get their cash anyway. So you can see why countries would like the power to nip that in the bud.
Bank Runs Still a Regular Thing
Catastrophic bank runs, and the most famous images of the ensuing chaos, are usually associated with the Great Depression era. However there are plenty of modern examples.
U.S. bank Wachovia was forced to sell itself over a weekend in 2008 after large customers withdrew $5 billion USD. Washington Mutual took the prize for largest-ever that same year, losing $16.7 billion before regulators ordered it shut down on a Thursday.
The Financial Crisis of 2008-09 also saw nationalization for U.K.’s Northern Rock and the collapse of Iceland’s Landsbanki, which left foreign account holders high and dry. Since 2013, we’ve also seen dramatic runs in Cyprus and Greece.
Many Banks May Hold Zero Actual Reserves
If you don’t know why bank runs are so disastrous to the institutions that suffer them, it’s because all banks nowadays run on a “fractional reserve” basis. Rather than keep the entire value of customers’ deposits in storage, they use that money for loans and other investments.
Reserve requirements are actually quite low, even zero in several Western countries and up to 10 percent for larger U.S. banks. So it doesn’t take much of a run to bring a bank down.
Proponents say this system encourages economic activity and growth, by putting spare capital “to work” instead of letting it sit there. Opponents say it’s risky, and essentially allows banks to create money from thin air, at depositors’ expense.
The central bank may lend funds in a crisis and the government may insure all or part of depositors’ funds — but ultimately it’s ordinary taxpayers who pay.
Here’s where Bitcoin comes in. It’s not possible to create bitcoins out of thin air — not “real” bitcoins anyway. Some exchanges have tried to implement a rudimentary fractional reserve system to cover losses from theft — Mt. Gox awkwardly, Bitfinex more openly.
However so far, no-one has operated a bank-style savings and loan for Bitcoin holdings. A large proportion of users would oppose it ideologically, and few would trust it.
In fact, Bitcoin’s nature means deposit-holding banks aren’t even necessary. The average person has access to a range of tools to store and secure their own holdings. For maximum versatility, a hardware wallet device like Trezor, KeepKey or Ledger is all they need. Tools to create offline, encrypted paper wallets are available for free.
The famous Bitcoin catchphrase “Be Your Own Bank” isn’t just marketing. It means that individuals with just a little technical knowledge can have full control over their own life savings.
Stopping Bank Runs Before They Start
The European Union members’ desire to suspend bank withdrawals isn’t really that earth-shattering. Bank runs can already be halted by technological limitations and by branches simply running out of cash.
The E.U. plan is looking to stop bank runs before they begin — even before the average user even realizes there’s a problem. However, that sounds like a better deal for a failing bank than a desperate member of the public.
The end goal, colloquially called the “war on cash“, is to insist all money is digital — and thus make the very concept of a bank run disappear. There’s no need to halt withdrawals if there’s nothing to withdraw.
Bitcoiners prefer another option: you can’t have a bank run, if there’s no bank. Until recently, that wasn’t an option. But it is now.
Is it possible to live without banks yet? Let’s hear your thoughts.
Images via Pixabay, Wikimedia Commons, Jon Southurst