We no longer need a deposit-based banking system. Government guaranteed deposits provide no benefit in a bitcoin world where currency can be more safely held outside of a bank than inside. See Bitcoin basics - no credit risk.
This is not to say that we don't need the other common functions of banking. In fact, banking services will be greatly improved without deposits as we can eliminate the high costs of interlocking credit risk and safety and soundness based regulation.
Below are predictions of what banking will look like in a post deposit, bitcoin-based world.
"Bank" - The term bank will either fall away or be colloquially used for any institution that performs the traditional roles of a bank.
Custody - Custodial services for private keys will be the backbone of the banking system. Governments may offer free custody insurance similar to FDIC protection of deposits.
Note Issuance - Banks will issue notes that can be exchanged for bitcoin on a one-to-one basis. Each issuer will add local features to the notes based on marketing, financial or governmental needs. See Bitcoin notes will deliver bitcoin to the world.
Payments - Bitcoin of course is its own payments system. The Bitcoin blockchain will be used as the primary settlement system for banks and as an optional payments platform for end users. Credit worthy entities will provide value added services on top of bitcoin with synthetic forms of bitcoin such as bitcoin notes. Banks currently have a practical monopoly on this space because of how the credit card networks were developed based exclusively on depository institutions. These legacy banks will continue to have an advantage if they adapt, but there will be much more competition without the need for regulatory oversight of deposits.
Lending - Lending will finally be divorced from deposit taking. Lenders will able to focus on lending rather than the regulatory protection of depositors. There will be no subsidy of the borrowing cost of bad lenders. It will be purely marked based, to the ultimate benefit of borrowers.
Money Supply - Governments will control the money supply by directly issuing government sponsored bitcoin notes. The reserve requirement (amount of bitcoin collateral) will depend on the creditworthiness of the government. Highly credit worthy countries such as the U.S. will be able to manipulate the local bitcoin note money supply much more effectively than they are currently able to do with their fiat currency using the deposit based banking system.
Regulation - Supervision of bank safety and soundness will not be necessary as there will be no depositors to protect. Each function of a bank will be regulated according to its appropriate policy considerations. Notes will be regulated with a focus on investor protection, lending with a focus on borrower protection, custodial activities with a focus on security, etc. We will no longer have a system where safety and soundness trumps other considerations.
Surveillance - This is the elephant in the room with many bitcoin discussions. Banks currently facilitate governmental surveillance of payments. Regardless of the degree of surveillance that we as a society decide that we want, there is no reason that this needs to be done through a global interlocking web of deposit-based credit risk as it is today. Surveillance will move to the other functions of banking, particularly payments and custody.
By Shane Hadden, CBP, CFA; firstname.lastname@example.org
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