Weekly Digest: The Beginning of the End for Traditional Banks?

Plus, New Zealand Acts to Tame Inflation

Welcome to your Sunday digest…my weekly breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week…a question. 

What’s the #1 advantage that traditional banks have over decentralized finance? 

Well, it’s certainly not returns.  

So-called crypto-banks—DeFi institutions that offer traditional financial services such as savings accounts and loans but using cryptocurrencies—offer vastly higher rates of return than traditional banks. Take the crypto-bank BlockFi. It offers up to 8.25% annual interest on stablecoins…cryptocurrencies that very tightly track the U.S. dollar. Other crypto-banks offer double-digit returns. Compare that to the 0.06% average on savings accounts at traditional banks. 

And the big advantage of traditional banks is certainly not convenience.  

Taking out a loan or transferring money through a crypto-bank takes minutes. Compare that to the cost in both time and money of seeking those services through a Main Street bank. 

No, the #1 advantage that traditional banks have over decentralized finance is that deposits are insured by a federal regulator, the Federal Deposit Insurance Corp. (FDIC). 

Customers know that if a traditional bank goes belly up, Dear Old Uncle Sam will step in and cover $250,000 per depositor, per ownership category.  

Because crypto-banks don’t have FDIC insurance, they are riskier. And because they are riskier, many normal consumers stay away. (Though I still use crypto-banks because I don’t believe the risks are that great, and the rewards far, far outweigh the dangers.) 

Now, however, that situation may be starting to change. 

According to new reports, the FDIC is studying whether certain stablecoins might be eligible for its coverage. 

It’s not immediately clear when, how, or if this will happen. But if it does, it would be a game-changer… 

Stablecoins work because they are backed 1:1 by fiat currency such as U.S. dollars or equivalent assets. 

This move by the FDIC would be a federally backed guarantee that if the bank holding the reserves underpinning your stablecoin collapses, you’ll get your money back from Uncle Sam. 

Now, of course, this would apply only to the banks holding the reserves. If your stablecoin of choice collapses due to price manipulation or some other currency trading factor, you would still lose everything. Plus, this wouldn’t cover you if the crypto-bank where you deposited your stablecoins folded. 

Still…this would mark a major step in the mainstream legitimization of DeFi.  

Once stablecoins have FDIC insurance, how long would it be before major crypto-banks like BlockFi also gain this status? 

And once they do, how long would it be before the majority of consumers ditch the 0.06% they’re getting at their Main Street bank and choose to collect 8%+ in the DeFi economy instead? 

*** 

Next up this week…New Zealand. 

The country’s central bank recently raised interest rates by a quarter of a percentage point to 0.5%. This was the country’s first interest rate hike in seven years. And the country’s central bank signaled further hikes to come. 

New Zealand joins a growing list of developed nations that are giving in to inflationary pressures and raising rates. Norway, the Czech Republic, and South Korea have recently taken similar steps. 

This news comes amid reports from the International Monetary Fund that inflation across the world’s richest countries is exceeding central bank targets.  

In the eurozone, inflation accelerated to 3.4% in September…its highest level for 13 years. In Britain, inflation is running at 3.2% at an annualized rate and is expected to increase. And in the U.S., the core inflation rate increased 4.0% on a year-on-year basis in August, after gaining 4.3% in July. (Though somehow, 4% was considered “good” since it was lower than expected.) 

If these levels of inflation keep up, and they will, expect other nations to follow New Zealand’s lead and pursue rates hikes. 

*** 

Next up this week…a friendly reminder that the tax extension deadline for 2020 returns is almost here.  

Fliers who applied for the extension have until Oct. 15 to submit their extended return, which was originally due in May.  

If you miss the Oct. 15 date, you may owe late fees or more interest. The failure to file penalty is 5% of levies owed per month, capped at 25%. 

So, it’s time to dig out your receipts and determine how much of your hard-earned income you owe to Uncle Sam…if you haven’t already done so. 

*** 

Finally this week, China is not abiding by its agreements (surprise, surprise). 

In August, the U.S. trade deficit hit a new all-time high, as imports flooded into America amid the nation’s economic reopening. 

The gap between the amount of goods and services America imports versus how much it exports, now stands at $73.3 billion.  

Notable in this latest data is that China is significantly behind in its vow to boost purchases of U.S. goods. 

Under a bilateral deal implemented under the Trump administration, China agreed to sharply step up its imports from America. Though of course, that has yet to happen. 

U.S. Trade Representative Katherine Tai said the Biden administration is going to start discussions with China soon to get it to abide by the deal.  

I wouldn’t hold my breath. 

While a large trade deficit is not necessarily a bad thing, a large deficit with your biggest geostrategic rival is not optimal. 

China is unlikely to ever simply increase its purchases of American goods. What the U.S. needs to do is ensure that American companies enjoy the same access to the Chinese economy as Chinese companies enjoy in the U.S. 

And if China is unwilling to grant complementary access, then the U.S. shouldn’t be afraid to act accordingly. Some things are more important than cheap toys and T-shirts. 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, please reach out through the contact form on the Global Intelligence website. I’d love to hear from you. 

Enjoy the rest of your Sunday.