Great Depression 2.0: No Worries! Be Your Own Bank!

Introduction

The Great Depression was one of the worst economic downturns in the history of the United States. During this period, a substantial number of banks went bankrupt which in turn caused a collapse of several businesses. As a result, unemployment peaked at an outrageous 25 percent. 

Expecting such failures of the banks, panicked savers withdrew cash from them which eventually led to insolvency of an even greater number of banks and people ended up losing all their savings with banks. 

Great Depression 2.0

With the recent rise of unemployment rate worldwide and the expected economic downturn, these have led to the question of whether there will be another “Great Depression” in the wake of the coronavirus epidemic and particularly whether banks would fail, and cash would become useless. 

During the Great Depression, the banking institution prevailed as, at the end of the day, people need somewhere to store their money. Due to security reasons, people are reliant on banks. This was only a consolidation of risks.

Blockchain to the Rescue

With the turn of the century, however, new technology on the horizon comes to the rescue! Blockchain, being one of the technological and financial revolutions of the decade, has come into play in such pandemic. 

A blockchain is a completely different story from traditional banks in the sense that it is a decentralised and global digital currency outside the control of traditional banks and not backed by any central government, which makes it immune to any interference from banks and government especially during the time of recession. In other words, there are no traditional banks involved and people can be their own banks.

Apart from the fact that the transactions stored in the blocks are contained in millions of computers participating in the chain, there are loads of benefits of blockchain technology. For example, in terms of security, data stored in the blockchains cannot be altered or removed. Protected cryptography is also applied to secure data. In terms of reliance, as mentioned, its verification is not dependent on any third parties including banks. 

If the Banks Cannot Defeat Blockchain, they Shall Embrace Blockchain

Due COVID-19’s unprecedented impact, the use of blockchain has been accelerated worldwide. With everything in the virtual realm, theoretically, physical closure of business will not as adversely affect this ecosystem. 

While banks in Hong Kong may have just resumed normal work arrangement, most banks in the U.S. and Europe still allow employees to work safely from home. Even relief cheques took weeks to get to the end-users (with many not having survived long enough to cash in such cheques).

In light of such an extra layer of complexity, these traditional banks are facing difficulties in providing services required by their customers or corporate clients, and are experiencing declining profits as the virus spreads around the globe. 

On the other hand, without physical interaction, virtual banking and blockchain technology seems to be the only way out. Bank customers can access their online banking portal to check their cash position and transfer cash to one another at their fingertips. 

Traditional banks started to deploy application programme interfaces (APIs) to provide their clients with necessary advice and products with social distancing being achieved and blockchain for procure-to-pay to facilitate supply chain trading. These point to the fact that traditional banks have started to value the use of blockchain technology amid COVID-19.

Indeed, COVID-19 has already hampered the financial market. Equity prices on major stock indices around the world as well as bond yields have fallen sharply. Crude oil price has also dropped by more than 50 percent. Meanwhile, we are experiencing market volatility since the markets are trying to price using the worst-case scenario. 

It is not hard to imagine that liquidity stress may follow, which in turn increases the probability of default. Corporate and household debts have also reached record levels recently. If traditional banks do not transform their mode of service and follow the trend of blockchain technology, they may just be prone to failure (as their ability to deliver service is adversely affected). Whether a bank succeeds is all about customers’ confidence. 

Conclusion

That said, technology waits for no one, not even banks. And whilst it might not be practicable or even possible to be your own bank in the 1920s (unless you count storing gold under your mattress), technology has enabled people to be able to be their own banks today. 

While no one can tell whether there will be a Great Depression 2.0 in times of the novel coronavirus epidemic, always bear in mind of the followings:

1. Be your own bank and create your crypto wallet, remove the reliance on traditional institutions.
2. Carefully analyse the capital positions relative to the risks traditional banks are exposed to.
3. Stay safe, stay healthy! 

– Joshua Chu, Solicitor, Group Chief Risk Officer at Coinllectibles

– Rex Leung, Solicitor