Can Silicon Valley Reinvent Banking?

I am generally optimistic about technology.  Heck, I am generally optimistic about most things.  But I don’t feel so optimistic about the idea that silicon valley can shake-up modern banking.

In a recent piece on Bloomberg Marc Andreesen says:

“We have a chance to rebuild the system. Financial transactions are just numbers; it’s just information. You shouldn’t need 100,000 people and prime Manhattan real estate and giant data centers full of mainframe computers from the 1970s to give you the ability to do an online payment.

‘‘You would not today, starting from scratch, invent any of these financial businesses in the same way. To me, it’s all about unbundling the banks. There are regulatory arbitrage opportunities every step of the way. If the regulators are going to regulate banks, then you’ll have nonbank entities that spring up to do the things that banks can’t do. Bank regulation tends to backfire, and of late that means consumer lending is getting unbundled.”

I don’t know about that.  When we look at the monetary system we have a system that is dominated by private entities (banks) with very deep pockets and regulatory capture that have dominated the entire system for hundreds of years.  You’re talking about disrupting the oldest oligopoly on Earth.  And while it’s a nice thought I doubt the banks are going to rollover and just let a bunch of tech nerds take their piece of the pie.

The banks have spent trillions of dollars building an infrastructure and regulatory structure that places them at the center of modern money.  They control the entire payments system.  All of these tech companies like PayPal or even Bitcoin are operating on subsystems to the deposit system.  In order to disrupt banking you need to essentially topple the dominant system.  You need to take the deposit system away from the banks.  You need to become the dominant money creator and you need to get the government’s stamp of approval on it.

Andreesen goes on:

‘‘The startups chasing disruptive technology aren’t working within the existing system. This is the cryptocurrency phenomenon. If it works, we can re-implement the entire financial system as a distributed system as opposed to a centralized system. We can reinvent the entire thing.

‘‘Bitcoin is clearly in this category. With bitcoin, there are advantages to decentralizing the financial system in order to do commerce. For instance, you can make payments in all but four countries. So, on day one, you can use it all over the world. Forget about all the different currencies and banking systems; it’s a truly universal way to transfer value.”

I think this is a misunderstanding of the modern monetary system.  Any payment system that is decentralized and makes public purpose less impactful will be regulated away.  After all, the payment system plays an essential role in helping the government achieve public purpose.  Money and public purpose go hand in hand.  The idea of “decentralized” money is the antithesis of government.  And so long as we have governments we will monetary systems dominated by payment systems that allow public purpose to be fulfilled in an efficient manner.  The bankers realized this long ago.  They don’t fight against the government.  They fight alongside the government.  This is why banks are so intertwined in the Federal Reserve System and work hand in hand with the US Treasury.  The idea of “decentralized” money is a libertarian pipedream that will only come to fruition on subsystems.  They will never come to dominate the modern monetary system because the core idea of “decentralized” money is at odds with public purpose.

I don’t doubt that we will continue to see huge advancements in the technologies utilized in modern payment systems.  I even think there’s a good opportunity for blockchain technologies to run parallel style systems with modern banking. But this will be a morphing of the current system rather than a reinvention of it. Old fashioned lending will always exist because it’s an essential part of any capitalist economy and an elastic currency. And some centralized entity has to be involved in all of that because that’s how public purpose is implemented.