Why is Bitcoin different from Digital Money?
In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood; the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:
- Rather than banks receiving deposits when households
- save and then lending them out, bank lending creates deposits.
In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance. Monetary policy acts as the ultimate limit on money creation.
Bitcoin is a complementary technology
Bitcoin works as a complementary technology to our current legacy banking system but also as a bridge creating a new super layer of “finance” which operates autonomously on the internet with its own built in accounting, security, payments & settlements system and unit of account, all neatly rolled up in an open source protocol that cannot be controlled by a single entity, group or state.
This “super-layer” can interact with any regular FIAT currency and is perfect for large cross border transactions as well as “fractional spending” for content consumption. This I believe will have great impact on traditional financial services, as the single individual now becomes empowered to choose which fiscal policies he/she believes in and ultimately supports. We are becoming a global world and Bitcoin is bringing us a step closer to global financial inclusion.
The industry is very much a “new born” but has come on in leaps and bounds since its inception, already exemplified in the fact that the Bitcoin network is currently the biggest computer network on the planet with more processing power than that of the known supercomputers combined.
With such liberty also comes responsibility and is it imperative that individuals understand how “Money” is created and controlled in order to make informed decisions about their personal finances as well as understand the monetary policies in place in their selective jurisdictions.