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Author: Simon Dixon

Can the world really work without a bank?

Updated Tuesday, 17th June 2014
A new phenomenon - crowd funding - will mean a bankless world could be possible. And for the first time what gets funded could reflect the values of society, writes Simon Dixon.

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A cartoon depicting 'Crowdfunding heaven 2014' with fallen angel investors tumbling out of the sky.

A little-known fact is that banks have three unique qualities that make it almost impossible to live without them.

  • One, when you deposit your money with a bank, they actually become the legal owner of your money, as the people in Cyprus recently found out when their deposits were confiscated through bank bail-ins.
  • Two, they can spend your money as they wish through who they decide to issue loans to. As most money is directed through the appetite of bankers' loans, they control a much larger percentage of money than governments.
  • Three, they are actually the creators of 97% of the money supply. When a bank issues a loan, that creates brand new money and bank-created money accounts for 97% of every penny in existence. It used to be kings and governments that controlled and created money, now it is banks – that is, until very recently. A combination of CrowdFunding and Digital Currency has the potential to shift power away from banks and towards everyday people.

If you have not heard of it, Equity Crowdfunding is like an online Dragons' Den where entrepreneurs get to pitch their businesses online and you get to invest in their shares online, starting from as little as £10 to build your portfolio of long-term, high-risk, high-return assets. was one of the first Equity CrowdFunding platforms to launch.

Bitcoin (and other crypto-currencies) offer decentralised, peer- to-peer payments for anybody with a Bitcoin wallet, available to all, with a phone or computer connected to the internet. I know, I know, what a load of jargon, so let me break it down for you.

Bitcoin represents a new era in money creation. Before digital money, governments created most of our countries' money through coins and notes, backed by gold. Then the power to create money shifted to private banks, who today create over 97% of our money, backed by debt. In 2009 Bitcoin created the first alternative that got early adoption and in 2013 it exploded. Bitcoin allows people to create money decentralised across millions of computers around the world, backed by server power and an open source ledger called the block chain, that is backed by maths.

What does it mean? It means that anybody with the technical knowledge and computer power can become a central bank in Bitcoin. Think of Bitcoin creation (mining) as a national lottery where your computer solves a series of mathematical puzzles and when the miner's computer gets one right, it gets paid with newly minted Bitcoins. You might think that this gives an advantage to those that understand mining and computers, but the reality is mining is very expensive in energy bills and not very profitable. People mine for the love of Bitcoin and a small reward.

But you don't need to know any of that to get involved – just like most people don't know where bank-created money comes from – you as the end-consumer can simply benefit from using it as a free payment system that has no geographical boundaries or exclusion to who can be involved. You don't need paperwork to get started and you don't need a bank account. 2013 saw both Equity CrowdFunding and Bitcoin experience explosive growth.

Traditional venture capitalists and financiers called for equity to remain an asset class just for the rich, and Bitcoin got its share of critics accusing it of being a Ponzi scheme, enabling illegal activity (if this was a reason to get rid of Bitcoin, you would be able to use the same argument to ban cash). And as the price of Bitcoin exploded, traditional traders and speculators joined the market to try and make easy, fast money from the price rise and critics cried out loud how it is too volatile to be of any use.

Unfortunately the critics have completely missed the point. Why? They are judging Equity CrowdFunding and Bitcoin from the perspective of those who are already investors and fear a threat to banking as we know it. While both Equity CrowdFunding and Bitcoin are very disruptive to traditional finance, the true power of these innovations is for the financially excluded. Here is why the critics should hang their heads in shame and take a look in the mirror. For one second stop thinking of Bitcoin as a threat to banking and start thinking of those that the banks don't want to touch. 

Think of the billions of people who can't make payments because they don't have bank accounts.Think of the entrepreneur who risked everything on having a go at a business and was bankrupted in the process, and is now cast aside from the banking system. Think of the micro-business that cannot afford processing fess or qualify for a merchant account to accept any payment other than cash.Think of the citizens of the country whose banking system has imploded and confiscated all the depositors' money as its government struggles with debt to bail out its countries' banks.

Then think that now all of these groups have a bank account called a Bitcoin wallet, now they have the ability to make and receive payments and now they don't need the permission of a bank. The miners are millions of central banks and the people are now banks.

Equity CrowdFunding allows people to start investing small, it allows the student to get started building their portfolio early, it allows the business to raise finance where no financial institution was interested, it allows the people to decide which businesses get funded and the early adopters to share in the failure or success of the business and support it along the journey.

In 2013 the UK regulator, the Financial Conduct Authority, opened up Equity CrowdFunding beyond just the wealthy, and in 2014 I will continue to educate MPs, the Treasury, regulators and the press on the true opportunities brought about by the financial inclusion of Equity CrowdFunding and Cryptographic Currencies like BitCoin.

For those bankers and investors that think only of what consequences it has on your world as a wealthy angel investor, or the threat it may be to the banking system you know, I encourage you to think beyond 2014. If not, 2014 will leave you behind as financial inclusion is more attractive to the people than financial exclusion, and guess what? CrowdFunding and Bitcoin decentralises the decisions of what gets funded, and the power to create money, to the people.

2014 could be one of the most exciting years in financial history. In the future what gets funded could reflect the values of society for the first time. I believe that nuclear warfare will be less successful with CrowdFunding than it will with banking. Now this can be done without the banks.

Further resources

This blog post is part of Society Matters. The blog seeks to inform, stimulate and challenge our understanding of this changing world and of our humbling role within it.
Want to know more about studying social sciences at The Open University? Visit the Social Sciences faculty site.

Please note: The opinions expressed in Society Matters posts are those of the individual authors, and do not represent the views of The Open University.


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