Anyone who has ever opened a traditional savings account, obtained a mortgage or acquired a loan should be familiar with the basic concept of interest.
If you deposit savings a bank will pay you interest; the interest rate offered increases the longer you are prepared to leave your savings untouched.
If you want to borrow money, a bank will lend it to you, but you’ll have to pay it back plus interest; the level of interest will depend on whether you secure the loan against an asset (like a house) and your credit history.
In both cases interest rates are relative to a base rate, set by a central bank, which manipulates the rate in order to either promote or reduce economic activity. For this reason, interest rates are often described as the price of money.
Where things get really interesting is realising that the central bank allows private banks to lend out far more money than they hold on deposit. This is what is known as fractional banking.
Not satisfied with making a profit from charging more interest on loans than deposits banks engage in far more complex investments, with a huge amount of risk with money they don’t actually hold on deposit.
The 2008 financial crisis saw that whole system come tumbling down, at which point banks were bailed out, and because of the impact on the wider economy, interest rates plunged to try to stimulate activity.
In that context it is no surprise that banks are distrusted. They crushed the economy, were bailed out and in return, savers get terrible returns on their money. Opening an account or applying for a loan are still complex procedures, requiring a lot of personal information and approval.
The emergence of the crypto-equivalent of traditional banking products shouldn’t come as a surprise, after all, crypto is rebuilding the financial system in a fairer, more transparent way.
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