People Misunderstand Cash Deposit in Banks and Ignore Bitcoin

A cash deposit at a bank is practically an unsecured loan to the bank, with no guarantee that your money is safe and easily accessible. To make matters worse, the bank determines the terms and conditions of such a loan.

When you deposit money in a bank, you relinquish legal title to the money and it becomes the bank’s asset. As a result, you become an unsecured creditor of the bank. That is to say that the bank does not give you any guarantee in the event of default.

Banks insure cash deposits with a government entity to ensure the safety of your funds. In the United States, for example, the Federal Deposit Insurance Corporation (FDIC) guarantees up to $250,000 per person and per insured bank. The insured amount is much lower in smaller economies. The Kenya Deposit Insurance Corporation insures up to $4,279 per person per bank in Kenya.

In the event of a collapse, depositors are entitled to the amount specified by the deposit insurer in their jurisdiction. This implies that the traditional notion of depositing money in a bank for safekeeping is incorrect. Banks use your cash deposits for high-risk businesses and only keep a small portion available for withdrawal.

Between 2015 and today, three Kenyan banks have collapsed. These are Dubai Bank, Chase Bank and Imperial Bank. Most people don’t know that when a bank fails, depositors don’t come first. Assets recovered from a failing bank are used to pay unpaid employee wages, unpaid government taxes, and secured creditors before paying depositors in cash. The dissolution process could take months or even years.

Whenever a bank run occurs – an event where a large number of depositors make large withdrawals in a short time, often in panic – commercial banks may limit withdrawals to a certain dollar amount per day. This means that depositors are not guaranteed access to their money on demand.

If you live in a relatively stable economy with working systems, the fear of not being able to access your money on demand is minimal. In most African countries, you need immediate access to your money to deal with emergencies such as hospitalization. Yes, before admitting a patient, some hospitals require a cash deposit. If your bank’s ATMs are running out of money and you have no other choice, it could be a matter of life or death.

In February, when Russia invaded Ukraine, panic set in as thousands of Ukrainians rushed to banks to withdraw their deposits and use them to flee the war. Some ATMs dried up and people were forced to use cash and their Bitcoin holdings to fund their trips.

According to Bitcoin Mtaani, an African startup translating Bitcoin content into African languages, young Africans have no business giving unsecured loans to commercial banks. Instead, they should become their own banks by converting their money into Bitcoin. With Bitcoin, they can always access their money on demand.

The conditions of the “unsecured loan” to banks are not favorable. If you were to lend your money directly to the market, you would charge a competitive interest rate that includes inflation charges for the term of the loan. Compared to amounts paid out to shareholders, the interest rate banks pay on savings accounts (their unsecured lenders) is pennies.

If you think of money as a technology for storing and transferring value over time, you will realize that fiat money has not achieved this goal because the stored value erodes over time due to the currency devaluation. So, if you decide to take an unsecured loan from a commercial bank to be kept safe with annual interest, you should know that there is better technology to store and preserve the value that does not require you not to give another party control of your money. This technology is Bitcoin. Although volatile, it has increased the purchasing power of its holders over the past 12 years.

To access your money in your bank, someone would have to steal your ATM card, PIN and passwords. Bitcoin offers a similar level of security without requiring you to cede ownership and control of your money to a bank. A thief would need access to your private keys, PINs and passwords for your bitcoin wallets in order to steal your bitcoin.

Banks are mostly inaccessible in most African countries during times when you need to access your deposits. This includes holidays and medical emergencies that occur at night. Your banking app will crash frequently and credit card payments will drop frequently.

Providing an unsecured loan to a commercial bank can give the impression that they will be first in line when a credit facility is required. No, the government takes precedence.

The government is the largest lending customer for commercial banks. Homeowners with mortgages are arguably number two. Before considering individual savers, banks consider lending deposits to businesses.

If you are lucky enough to get a bank loan, they will classify you as relatively high risk and charge you higher fees compared to government and big business.

The Bitcoin ecosystem is growing and allowing people to store value, transact, and access other financial services without making unsecured loans to banks that don’t prioritize them.

Disclosure: I own bitcoins and other cryptocurrencies.

About Ian Crawford

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