HaLin is a fan of Fermi Problems, inverting intractable issues, and conjuring up humorous solutions.
This Radical Proposal is a humorous missive on a serious topic. How credit would look like in a crypto world.
Crypto Earth Bank
One of the successes of paper-based monetary systems is the ability to let citizens ‘own’ other people’s money. The fractional banking system, through the multiplicative effect of credit, enables consumers and businesses to have access to capital that they do not own. This system, despite periodic boom-bust cycles, has succeeded in delivering economic ‘growth’. Cash + credit = ‘wealth’. Throw in more credit and voila! more wealth is created.
Earth Bank Crypto (EBC) currency could be created by converting the stash of current notes and coins in circulation in the world (around $ 5 trillion) and distributing it equally to the world’s 7.6 billion people. Each of us would get around $ 658 equivalent of EBC in our decentralised Earth Bank accounts. This is all the cash that each of us would start with. (This would have the happy consequence of silencing wealth inequality activists. Everyone would be equalised by a stroke of computing power).
No central bank, or governments, would be needed to play Class Teacher to keep errant students in check. Or so the idea would be, in theory.
True to our innate nature, though, several would aspire for more wealth. To satisfy our economic needs and unsubtle aspirations at wealth enhancement, we would urgently need access to cash that we did not own.
The Greedy Lend To The Needy
Unused crypto balances of holders could be lent out to those in need of money. Transactions could be recorded on the blockchain, so the trail identified borrowers at all times. To repay, with interest, the borrower would need more crypto. For instance, A borrowing EBC 100, would have to repay EBC 105 at year-end. The borrower would be able to repay with interest only if they managed to garner new cryptos from the existing pile. Borrowers that consume EBCs away with no thought of repayment would be in a bind to repay their crypto debts.
Some enterprising savers, meanwhile, would take to making markets themselves. They would ask for an interest as compensation for their troubles and to protect against defaults. The interest rate they would desire would vary as per varying urgency demands of borrowers. With time, demand for EBC credit would outgrow the rate of growth of EBC itself, leading to interesting outcomes.
The demand would cause the price of EBC and the borrowing rate to go up.
The insatiable growth for EBC credit, and subsequent lack of easy access to new sources of funds, would lead to a wave of defaults. Borrowers and other affected parties would blame usurious crypto lenders. They would urge the Earth Bank to print new crypto. Or let them tap into more unused cryptos, if EBC had a finite limit like Bitcoin. New EBC, or unused cryptos, would have to be passed on borrowers, so they could make whole on their debts.
Or CreditEBC would come into existence.
With a sole purpose of being used as a transaction medium for EBC credit. Forks, specifically created for credit, could ‘speak’ with other crypto currency through a market observable exchange rate. Rising demand for CreditEBC would cause its price to rise. Unable to access either EBC or CreditEBC, the weakest borrowers would eventually come unhinged. Leading to defaults. And a few suicides.
Earthlings would find that this system was similar to the present system.
Cascading defaults would lead to a systemic too-big-to-fail problem. Not unlike the present situation, where banks rely on central bank for bailouts. A consensus would be needed. Finding themselves out of a job, bands of people around the world – who earlier called themselves governments – would try to create a new role for themselves. As overseer of the Earth Bank. They would also aspire to resolve newly created inequalities. Decentralised computing power, overseen by a global band of people, would determine crypto creation. Forks of the inedible kind, built after a consensus was struck, would lead to new crypto currencies.
The blockchain sought to break free of the institutional imperialism of governments and quasi-governmental institutions.
The Earth Bank could take the Earth right back to status quo.
Past Radical Proposals gathering virtual dust.