Liquidity Must Flow
In my previous Blog MasterCard's Payment Pain: A Regulatory Nightmare I discussed how the MasterCard payment system is reacting to the new regulatory environment post Great Recession. This new hyper regulatory and privacy invasive environment is partially a reaction by government to money fleeing traditional systems of savings and investments as many consumers have lost confidence that these structures will operate in a fair and transparent manner. I want to dive a little deeper into this topic and flesh out a few more points in this post.
The Great Recession Through a Small Bank's Eyes
In my assessment distributed ledger technologies (DLT)) and Crypto currencies in general provide a reasonable alternative to the Central Banking Settlement and Clearing System (CBSCS). The general crisis in confidence of traditional CBSCS has pushed forward the development of decentralized network of payments in which ownership of assets are much more easy to ascertain and the rules of such networks are clearly defined. As I touch on briefly in my Post The Banker’s Distributed Ledger, An Alternative Asset Clearing and Settlement System unlike other settlement systems in which the ultimate custodian of your asset may be 3-4 levels removed, DLT provide a very clear and transparent structure of ownership which is extremely valuable during a general market and economic crises. If the 2008 crisis showed us anything it was that even the top market participants i.e. the banks where not certain which banks had liabilities and which banks had assets. Just like musical chairs you hoped that your partners including intermediary and institutional level banking arrangements had sufficient assets to cover liabilities in a tangible manner or you might be the one left without a chair. The interbank lending system completely ceased functioning properly according to Christoph Rieger from Dresdner Kleinwort in Frankfurt as “Central banks ‘were’ the only providers of cash to the market, no-one else ‘was’ lending."3. Given that small and medium sized banks rely on these intermediary and corresponding banks for their access to the central banking system they where effectively shut out of the lending market, and had no way to know if their assets at their custodian banks where incombered or not and if the bank in possession of the assets was still solvent.
Transparent Asset Liquidity Settlement and Storage System Introduced
The Project Jasper means tested and demonstrate that DLTs can balance market participants needs for privacy with the broader need for a transparent set of rules and structures to ensure a repeat of the credit crisis of 2008 does not repeat itself. I like to refer to a clearing system that incorporates DLT as the Transparent Asset Liquidity Settlement and Storage System (TALSSS). Consumer understand that knowing where your assets are held and being able to move those assets at any point during the business and market cycle is of primary importance. It is also understood that money leaving the traditional central banking system into the TALSSS system is a zero-sum game. This liquidity which is leaving the Central Banking system could have been leveraged to offset structural instability now must be accounted for in transparent and fair manner for all market participants. This would level the playing field between the small, medium and largest banks as the largest participants currently arbitrage their preferential access to information in terms of their asset distribution knowledge to be better positioned for market instability and liquidity. Would TALSSS help to create a fair game for all participants where a bank’s capacity to win would not be its size, political and economic leverage but rather the efficiency that the participant could navigate and operate within the new DLT structure. As it relates to consumers and their liquidity preference between Central Banking Settlement and Clearing System and TALSSS, they may continue to have difficult in transiting liquidity to the TALSSS via traditional payment systems such as MasterCard, Visa, Debit. As structural instability of the Central Banking system and volatility progresses banks will refuse to accept to facilitate liquidity transfers out of the Central Bank system into TALSSS unless they themselves have a stake in such a system.
Final Remarks
To Conclude, “These regulatory gatekeepers perceive the risk to the central banking fiat system of allowing capital to flee into alternative competitive crypto asset classes”4. We will continue to see banks limit their offering of convenient payment system to clients for the purpose of crypto transactions. There are many reasons on the part of the Banks and regulators for limiting our freedom to transact, but typically they involve mention of the volatility of crypto currencies followed up with classic central banking doctrine ‘we know what is best for your money, trust us’. Trust is a 2-way street which must continuous flow and no one must cheat. The current central banking liquidity system has failed to provide the small to medium sized bank with a fair and transparent transactional system, and more market participant wake up to this reality we will inevitably turn towards a Decentralized DLT such as TALSSS to lead us forward out of the shadows of banking and into the light.