Happy 4th of July to all the United States subscribers! On this day on 1776 USA declared independence from Great Britain. The country is celebrating this day with pride, fireworks, happiness, and smiles.
Some of the key principles of United States political and social norms are captured in the U.S. Constitution, which over time evolved through a number of amendments. The first amendment of the U.S. Constitution covers the principle of separation of church and state. This was a radical experiment at the time, however, it proved to be an enduring pillar for which the country could grow and prosper. It allowed immigrants of all beliefs and backgrounds to come to the United States without fear of persecution based on their beliefs.
Much later, in December 1913, the Federal Reserve Act was passed in the United State Congress and signed by President Wilson. This act established the U.S. Federal Reserve (or simply Fed) which is now as a quasi-public, independent institution outside the three branches of government. The Fed pledged to conduct monetary policy for long term economic prosperity and growth.
Fast forward to today, in 2020, we are on observing a challenging time of economic recession severely impacted by the COVID 19 virus. In such a time Fed has doubled down on its policies of liquidity injection, quantitative easing, purchasing of corporate and government bonds, and other forms of issuance of US Dollar to provide funds to other governments, US banks, large public and private organizations.
In October 2019, the Fed announced a plan to buy Treasury Bills to the tune of $60 billion per month into the second quarter of 2020. From September 2019 up until the start of the pandemic, the Fed purchased treasuries and expanded its balance sheet by $500 billion from $3.7 trillion to $4.2 trillion. This was before the U.S. had its first reported positive case, now the Fed’s balance sheet is at a pretty $7 trillion.
From the Federal Reserve Website:
Bitcoin Is An Alternate Financial System In The Making
Alternatively, Bitcoin has been operating exactly as designed and underwent “quantitative hardening” for the third time when its inflation rate was cut in half in May. Bitcoin is an experiment that represents society’s best shot at instantiating the division between money and state, an experiment so radical it may actually work. Instead of relying on a small group of bankers and politicians to set the course of monetary policy, Bitcoin’s monetary policy has been set in its software ever since the first block was mined in 2009. Its community of stakeholders, developers, miners, and validators regulate the integrity of the system and anyone can tap into the open source software to ensure the predefined parameters are being met. I covered plenty of Bitcoin fundamentals in my previous newsletters, so I skip right to the next thought.
Evolution To Decentralized Digital Banks And Insurance
In traditional banking we bring our saved dollars to the local bank, and if not needing to spend right away hope to earn interest on these dollars. Unfortunately, the interest offered on these deposits is very low ranging between 0.1% to 1.5%. These low interest rates in the United States and around the world are driven by the existing monetary policy and aggressive central bank asset purchases. Furthermore, recent guideline from Fed reduced the reserve requirement for the U.S. Banks to 0%. This means that 100% of all dollar deposits can be lent out in a form of loans. Banks are happy to take advantage and issue loans to organizations and private citizens for purchasing a business, real-estate, and other property. The problems could arise if those loans are not paid back – in situations when renters don’t pay rent, businesses are closed and can’t pay their loans, malls and theaters are empty, and corporate headquarters are standing idle. Times like we are in right now. Luckily FDIC ensures the deposits for up to $100,000, so if any of the banks can’t pay back any of its deposits the Government insurance steps in and covers the deposit.
Now, let’s imagine an alternative financial system with higher interest rates, safe deposits, and world-wide distribution. If Bitcoin and Stablecoins represent a store of value and direct transfer of value from person-to-person, what would lending of digital money look like?
I created this image to illustrate the model. Just like FDIC insures banks against insolvency, Nexus Mutual insures Decentralized Finance protocols against hacks. We now have a comparable solution!
I encourage you to read Nexus Mutual white paper and product offering. As a mutual company, you can become a member and benefit from taking out an insurance policy for your DeFi deposit. DeFi deposit rates are high, with most Stablecoins paying 10% annual percentage yield (APY) or higher, while insurance policy is generally only around 2% APY. Doing the math, one can enjoy approximately 8% annual return on their USD-pegged Stablecoin without a fear of their DeFi deposit being stolen.
Welcome to the world of peer-to-peer, decentralized finance, and digital economy! This emerging field is experiencing a huge growth. Soon we will start seeing tokenization, trading, lending and securitization of physical assets represented in the borderless and frictionless world of cryptocurrencies. Such a decoupling from a specific country, political party, currency – is what I call Separation of Money and State.
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