Application et influence de Cryptocurrency Banking

This article discusses the market and its applications in the cryptocurrency world. Decentralized finance is all about reinventing the wheel and experimenting (e.g. algorithmic stability coins), but the rules still apply because banking is a traditional industry.

The first division was completed by Haseeb Qureshi in his article Stablecoins: Creating a Stable Price Cryptocurrency (2018). The term Stabilitecoin generally refers to the safety of other assets, such as the United States dollar (USD). Stable coins are defined as fiat currency (dollar in a bank), crypto collateral (using dollar denominated loans recovered from a higher value of crypto assets), unsecured or algorithmic (no backing) .

This classification is still used today. In this article, we'll take a step back and take a look at money from a banking perspective and see how it can be applied to cryptocurrencies. Let's take a look at cryptocurrency banks using this framework first, focusing on currencies (real life and cryptocurrencies), economics, and liquidity (creditworthiness and liquidity).

A Qureshi -Stablecoins: Create a cryptocurrency with a stable price

banque level

A dollar bill is like a dollar bank, but that's not the only idea. This chapter deals with the hierarchy of funds. You can learn more by following Perry Mehrling, owner of "The Economics of Money and Finance" class or by reading the book "The Economics of Money". From gold and silver to bitcoin and central bank digital currencies.

At the top level, there are usually commodities (like gold), electronics (like Bitcoin), or fiat currencies (like the post-gold US dollar). Many levels have been designed here for convenience (better to buy coffee with foil than gold) or for government regulations (such as the Bank of Amsterdam restricting the use of coins) .

currency level

Let us give a simple example of the American process during the gold standard (after the formation of the Federal Reserve around 1920). It is a three-tier system.At the top level is gold, which is safe but difficult to use.

In the second phase, the Federal Reserve will announce two types of agreements (IOU) to pay for gold.The first comes in the form of a Federal Reserve Bank form, the same one you use on a daily basis. Under the Gold Standard Act, this is a contract to pay a price of gold of $ 20.67 per troy ounce.

Layer 2 silver during the gold standard

The bank accepts Federal Reserve banknotes and puts the money in the bank, a level 3 currency.The bank agrees to provide you with a Federal Reserve deposit upon request.

To simplify the flow of money through banks, you just need to keep your papers with the Fed. No need to change gold or Fed bills every day, just fill in a new row on your list.All of these points are called results. But it is only when the bank loses business or the country moves away from the gold standard that you will know that level 1 money is the best and the only real money.

American money class in 1920

Bitcoin hierarchy

The same layer exists in Bitcoin.At the top is BTC, the currency of the Bitcoin network, which is the first and highest level of the pyramid.

The second layer holds the BTC on exchanges such as Coinbase. You don't have any bitcoins on the exchange, you just need a bitcoin IOU.Placing BTC on an exchange increases the ease of trading it for other benefits. The exchange must hold BTC, not play with it. Kraken, for example, provided proof of storage, which the bank kept entirely.

Bitcoin hierarchy

The second layer is also the lending platforms for BTC like Nexo or BlockFi.In this case, you know how the lending bank keeps all of your BTC on its balance sheet. Some lend to third parties in exchange for benefits. They use partial reserves. In other words, there is not enough BTC to pay for every IOU issued. If you deposit 1 BTC, however, the lender will have to pay 1 BTC on demand. You can do whatever you want with BTC, like getting a loan.

The final product of the second layer is wrapped in BTC (WBTC). Procedures for converting BTC to Ethereum network.This activates the use of BTC on DeFi and activates Layer 3. When you place the WBTC in Yearn or Aave, that WBTC will be used in the process and you will receive an IOU with interest rate. Aave allows you to receive WBTC on demand (in most cases). Some WBTCs lend to other consumers for a fee (return of another cryptocurrency). Aave also has a security module that pays people in the event of a disaster. This is a partially reserved bank.

A portion of the stock, available and negotiable interest will be allocated to each form of second level BT (Bhatia, Nik) at interest rates. Currencies on several levels: from gold and USD to Bitcoin and central banks.

Hierarchy of money, euros and cryptocurrencies

I will be coming back to the US to revise this model and revise it in 2021. We also have Fed reserves (gold is depreciated) and US bank deposits like Citigroup. Let's get rid of the Fed bills because no one can use the commercial paper.

Two new levels can be added. The first is EURUSD, which refers to all bank deposits that cannot go to the Fed (such as a non-US bank or branch). Founded after World War II, the development of the company has been driven by arbitration management. First, some countries do not want the United States to strengthen their currencies, and it is safer to use foreign banks as agents. The EURUSD market has been booming recently. The market is now as big as the dollar, and you can open a Eurodollar account in the United States.

In a similar vein, the crypto dollar is the dollar of the blockchain. Stable coins like USDC were supported by the low value of the US currency in US banks, but the coins themselves did not fall under US monetary regulation. Tether is based on the old model and is only supported in euros, as US banks do not intend to provide services. It claims to be 100% transparent and supportive, but is considered shady. Finally, MakerDAO announced a U.S. tradable DAI Stability Coin (currently holding a USDC reserve of 22%).

This story isn't much different from the content of Haseeb Qureshi's previous article, Battle for Stability: The Evolution of Stablecoins, but it has revamped some points and removed the permissions metric.

In the race for security: Stablecoins exchange

At this point, we hear that the bank is adding a layer above the base currency to help its customers (easy to use or generate interest). But how do they make money?

Bank

Banks need income to pay off debts and members. They derive this income from two sources.Mental income and non-interest income.

Citigroup revenue

Non-interest income, also known as expenses

The easiest way to make money is to sell the product in a program. For my bank account, I pay monthly for the right to keep money in the system and to be able to receive and send money. For WBTC, Coinlist, one of the traders in WBTC, pays 0.25% to convert BTC to WBTC. Coinbase Custody charges 0.50% per annum to securely store BTC (and provide secondary funds, IOUs).It is closer to service income than to banking income. This is the only way to raise funds for a school that only holds assets that have been declared IOU.

net interest

Behind the heart of the bank are its interest rates.When you deposit money into your bank account, the bank may charge you 1% interest. This is the interest paid by the bank. These funds are loaned to other customers up to 3% of the bank's income.

Interest income is the difference between interest and interest rates.

The gap between the two prices is the bread and butter of the banking industry. In a competitive market without market distortions, the only way to minimize these spreads is to take risks.oftenBoth are :

Credit risk: the risk that the borrower will not repay

Depression: The risk that market interest rates will fluctuate if you borrow for more than one day.

Cryptocurrencies carry two major risks.

liquidation risks:The loans are oversized, but hope they can pay off the stock to avoid losses.

Risk rule: blockchain is code and rules can be misused to cause a crash.

The entire Reserve Bank does not take these risks.For example, Kraken Bank is a wholly owned bank. The same goes for Circle, which has USDC. As a bank, Kraken Bank is required by the State of Wyoming to regulate nominal deposit reserves at all times by 100%. If all three clients requested a withdrawal at the same time, Kraken Bank could make all withdrawals immediately, no matter how many loans we had (Kraken blog).

Fractional reserve banks change credit.These are check deposits and long term loans. This irregular growth is financially viable. They provide secured loans (usually with public insurance) to banks, and they provide small business loans that can be risky, earn interest, or earn profits. .

Total financial services and partial financial services

There are reasons the banks are not following suit. Limitations and failures can have serious consequences.

financial restrictions

Banks have restrictions that limit their ability to borrow too much and carry too much risk. This constraint is a solution, for example, to have sufficient assets to cover expenses, i.e. the ability to convert lower profits into higher profits at any time (for example, from USDC to bank account or bank to treasury). Both deal with the bank account balance.

Solution

The first limitation is resolution, which indicates that the business is able to meet its financial obligations.. If your bank has $ 2 billion in assets and you've put in $ 3 billion in bank deposits, you know something is wrong. If you withdraw $ 20 the first time, you will get it, but if you withdraw later, you will not get anything. Based on the simple theory of the game, all the users stopped and the system crashed.

This is a problem encountered by most algorithmic stability parts (eg, ESD, DSD, Basis). You can get creative by adding assets like “cash flow to the future”, but it provides a second solution.

Another part of the solution is the quality of the property.Saving your bank account with an unfair investment puts savers at risk.You may be heavy today, but what about tomorrow? If your wealth is at risk, you may feel more secure if your bank defaults if the value of the asset goes down. It's the bank's stake (or the rest of the non-MakerDAO).

It is generally divided into two sections. You can use the bank to save everything without risking depositing money in the bank. In this case, you do not need key pads. This is the case with most fiat-backed Stabilitycoins. In theory, this means that USDC can only withdraw US bank deposits (the numbers above). Secured assets like treasury bills or term deposits also seem to be considered very good options.

Things can get a little tricky if you live in a Métis bank. When you deposit money in the bank, you might not want to read every balance sheet to see what is good and what is bad. In most (all?) Countries, regulators apply activity level rules. These rules are in line with the Basel Accord, which defines the size of advertising activity that banks are required to maintain.

It's finish

Liquidity can be defined as low level loans distributed by higher income lenders.If this example is less than 1, not all customers will be able to withdraw their deposit at the same time. It's not that the bank is losing money, it's that it doesn't have the pretty profits it wants on hand. You may have to wait to get a higher level of funding.

Banking regulations such as Basel III use capital adequacy management (LCR) and liquidity securities (HQLA) to identify the amount of money banks should keep.There is skepticism (at least in the cryptocurrency space). Bank deposits are considered long term investments. It makes sense in the real world. People don't take all of their money out at the same time. Uncertainty reigns in the crypto world, full of self-destructive people who are willing to spend thousands of dollars a day to create the next process.

This is one of the reasons why Nexo announced a term deposit that will keep the body active at night. We encourage you to close your account for up to one year. This will prevent the liquid from evaporating when needed.

Impact on crypto banking services

In the real world, the spread between bank deposits is very small.The right to create homogeneity.. This is not the case in the crypto world where full banks (Paxos, Circle) and partial banks (MakerDAO, Nexo) are located.

Different banks will have different rules, some more stringent and others more regulatory. Some will be partial reserves while others can be returned with 100% Bitcoin. Interest rates may vary. Cash from some banks will be reduced compared to cash from other banks (Hal Finney, 2010).

As we have seen, every bank has a goal. The goal is to allow the bank to be able to reimburse the difference between income and expenses, among other costs.

You can compete for business / industry, payment tracking etc, but the most important thing is interest in depositors. If the sub-filing is riskier than its competitors, it can pay depositors more to satisfy them. This is why investing in Nexo gives you the benefit of the doubt, not Coinbase. You cannot earn interest from USDC, but you can earn interest using DAI (using DSR or Chai). Using a currency market like Aave differs because it has lower costs (aDAI and not DAI) with higher risk (but higher rewards).

A place to compete with cryptocurrency banks

So, for crypto banks, the questions are:

How do you manage your balance sheet to meet transaction and income needs while optimizing the allocation of finances and investments?

The winner will be the trillion dollar business.