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How centralized bank systems failed us

What would you do if you have money? You would save it, invest it (or buy a better lifestyle). You store it in Bank accounts which they invest for giving you interest on your deposited money. Banks provide loans and get interest from borrowers, but what if they lose the depositor's money from investment or loans are defaulted.

With dotcom boom bursting in 2002 after a dream run from the late 90s, Stock prices fell sharply, and people started withdrawing their money from Wall Street. Rate of Interest was at an all-time low on 1%, Investors were searching for a good investment option, and Real Estate was slowly peaking. Government and Financial Institutions were encouraging investors to buy Home taking Home loans.
As demands grew, House Prices started to see an upsurge.

How centralized bank systems failed us

Investors find it a lucrative investment option to invest in Real Estate. Seeing an upsurge, Investment banks started buying CDOs from Commercial Banks for Investment money.

Commercial Banking further lending the same money to Sub Prime Borrowers.  Brokers could make these deals to without investigating a borrower’s property’s values as Lenders they represented were keen on lending the money.

Lenders could sell the mortgages onwards; Commercial Banks would bundle them into securities (CDO) and transfer them to investor eager for returns which Real Estate was providing for long.

The Ultimate Investor or mortgage owner would often be unaware of their buying and only rely on Credit Rating Agencies (Rating by moody like agencies at that time was AAA means the safest investment) word.

After a duration, Sub Prime Borrowers started to default on their loans (due to increasing interests as the loans extended were mostly Adjusted rate loans resulting in many mortgages being at Commercial Banks disposal.

Mortgages with commercial banks causing declining prices of House led well off borrowers to started default too as It seemed beneficial to default than to pay interest on a property with depreciating value.

In an ever-speeding spiral, the bundled mortgage securities lost their AAA credit ratings, and banks fell headlong into bankruptcy.

Credit Rating Agencies were also found to be at fault because they gave derivatives like CDS/CDOs high ratings.

Mortgages transformed into highly risky investments.

The Stock Market crash happened on September 29,2008. Lehman Brothers filed Bankruptcy which was largest in history with $619 Billion in Debt.

This crisis brought the inherent shortcomings of banks and other financial institutions.

But Why am I discussing all this?

Because most of the crumble we saw in 2007-08 could be negated if there was some transparency among all parties while extending loans. After the Financial crisis, people needed a currency that wouldn't be controlled by a central authority

Investors were reliant on Credit Rating Agencies; they couldn't see their lending going to Sub Prime borrowers. So, Lack of clarity among investors, Govt. Institutions and regulatory bodies

Whenever we make a transaction from our money, we rely on Banks or Financial Institutions to verify and validate our transactions. Which introduce the risk of Banks getting greedy and investing our money in risky investments without our knowledge.

But what do we need from Banks?

  1. Proof of Validity

  2. Proof of Identity

  3. Data having integrity

  4. Easy Data Access

  5. Data Security using some encryption schemes

If any technology or system can provide us with all these, wouldn’t it just be convenient? Banks would no longer be needed, and Cambridge Analytica like fiasco could be avoided.
Banking remains without banks.

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