The Future of Banking Has No Banks

Here is a question for you?… When was the last time you drove to the bank? It may seem like an odd question, but according to a survey by GoBanking Rates, the majority of Americans (81%) prefer to bank on a web browser or a mobile app compared to 19% who prefer a physical bank. There is no doubt that scanning a check via mobile deposit is more efficient than driving to your local bank and handing the teller a piece of paper. The mobile experience allows you to perform all the same basic tasks as a bank, and in case something goes wrong, you can ask the chatbot to assist you or call the help desk number. Americans are becoming more comfortable with a digital financial system as seen by our willingness to trade physical banks for the convenience of an app.

Over the past month, we have seen the US banking system show some cracks. These cracks may seem patched up, but there is no telling when they will resurface again. I don’t think there is any professional analyst who can tell you when the fractional reserve banking system will falter again nor state with certainty that the system is 100% sturdy. As with everything in life, there are risks and people are now seeing more of the risks of having significant wealth in banks. Today we will outline how Bitcoin and Open Finance can continue the digitization of banking into the next phase without banks:

“Hyperbitcoinization”

The phrase “hyperbitcoinization” has been thrown around more often recently and refers to a hypothetical scenario in which Bitcoin becomes the dominant global currency. Proponents of this theory state that ongoing concerns about inflation and economic instability will lead individuals, then corporations, and finally governments to adopt Bitcoin as the primary store of value. Some of the proposed benefits of hyperbitcoinization include increased financial inclusion and greater economic efficiency.

There are potential issues related to regulatory oversight and the potential for wealth concentration. Such a future would line up with current trends in Bitcoin use in inflation-stricken countries in Africa and South America, as well as the trend of digital finance. Banks would lose importance in society as individuals would be able to store infinite amounts of wealth in uncensorable wallets under the control of their iPhones.

Decentralized Lending and Borrowing

One of the main benefits of banks is their ability to lend capital to fund entrepreneurs and businesses. Lending and borrowing are currently being replicated on blockchains like Ethereum with numerous benefits compared to their traditional counterparts.

Aave, for example, is a decentralized lending platform that uses a pool-based system, where lenders deposit their funds and borrowers can borrow from that pool by putting up collateral. The interest rates are determined by supply and demand, and they can change over time based on market conditions. You can view current rates here, which shows rates over 1.5% for US Dollar stablecoins such as USDC and USDT.

Financial inclusion is one of the main benefits of lending and borrowing in Open Finance since only an internet connection and a crypto wallet are needed. Since there is no bank, there is only a smart contract that takes no payment for its services. There is also no risk of a bank run since all loans are overcollateralized. Additionally, the collateral is 100% verifiable, since everything is recorded on the blockchain. Aave also goes further to allow transactions that are not possible with banks with the inclusion of “flash loans”. They are short-term loans issued and repaid within a single transaction. This allows users to execute complex financial transactions without having to put up collateral.

As we have seen, banking without banks has the ability to provide increased accessibility and transparency at lower costs with faster transaction speeds. There are new risks to note which include smart contract risk, where a bug in the blockchain code can be taken advantage of. Open Finance is still a recent topic, but it is definitely a field ripe with innovation that savvy investors will want some level of exposure to.

Joe Robert is currently the Chief Executive Officer of Robert Ventures, with over 20 years of asset management experience. Since he started Joe has created predictable double-digit returns for investors & Partners. Joe has invested in seed rounds with equity and tokens, along with a portfolio of Bitcoin, Ethereum, and other top cryptocurrencies.

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