Why Not Just Use Banks?

I know what you’re probably thinking. With all the problems and highly technical solutions in the last chapter, why can’t future space colonies just establish a common banking system? It would almost be easier than agreeing on which cryptocurrency to use. This is ignoring the idea that colonies that wish to participate in trade don’t even need to limit themselves to just one cryptocurrency. An especially enterprising colony could use Earthcoin, Marscoin, Orbitcoin and Solarcoin with equal facility.

What are international financial systems, anyway? They’re a common set of standards that have been agreed to by nations and organizations that wish to have the capacity to do business anywhere in the world. An American can travel to Europe without worrying about much more than exchange rates and where they can get the best deal when exchanging dollars to Euros. They’re meant to move money across international borders. Under ideal circumstances, all people would be able to walk into a bank and open a checking account right now, fund it with their paychecks, and use it to do business with anybody, anywhere, at any time.

However, circumstances are not always ideal. Even ignoring the fact that Mars has no banks, estimates show that roughly two billion people were considered “unbanked” as of the end of 2014 – they don’t have cheap or convenient access to financial services. Maybe there’s no bank within what we would consider walking distance where they live. Maybe the only way they can cash a check is to go to one of those check cashing venues, which are not banks and might charge high fees for the convenience. Maybe they can’t open a bank account because they have no way of establishing their identity, which is a common case for people who don’t have a photo ID or even a birth certificate that they can show on demand.

It is fortunate, then, that you don’t have to show a photo ID to download the cryptocurrency wallet of your choice. Sure, you sometimes need to be able to snap a high-resolution photo of your ID card to join one of the major Bitcoin exchanges, but that doesn’t matter when you just want to use it as a form of digital cash. The whole point here is to buy and sell on the interplanetary market, which is basically an economic environment that hasn’t developed the advanced financial system that Earth has.

The simple fact here is that financial institutions can deny service or even shut down an account at any time, for any reason, and they get away with seizing people’s hard-earned money for no good reason more often than they should. Many Bitcoin users made the switch from Paypal because Paypal is notorious for suspending accounts and seizing the money in them for no good reason. Paypal users practically have to hire an attorney to get that money back and most don’t bother because an expensive lawsuit would cost them more than the few hundred bucks they had in that account. Yes, this is theft. No, you should not have to pay for an attorney just to make sure you can access your legitimately earned money any time you want. (And no, I am not blaming Elon Musk here. I doubt he really has much to do with Paypal anymore.)

This is not a problem that is unique to Paypal. That 2 billion figure didn’t just come out of nowhere. Paypal does not operate in all countries, but this may be partially a function of the fact that many countries do not have a very well-developed financial infrastructure. If you don’t have a bank within three days’ walking distance, it is unlikely that you have a checking account. If you don’t have a checking account, you can’t confirm a Paypal account.

Of course, if you don’t have a checking account, you probably have bigger worries than access to a Paypal account. Many large and/or international corporations won’t talk to people who use cash for most of their transactions if they have a regular source of cash at all. Many Internet service providers have concluded that there’s no market for access to the Internet. It isn’t that people wouldn’t want the Internet and the resulting connections to worldwide markets so they can have an easier time earning a living. It’s that they don’t have the cash up front to pay for it, so ISPs won’t make the investment.

However, if a resident of one of these developing regions gets lucky and gains access to a cheap mobile device and a Wi-Fi connection, that person can download a cryptocurrency wallet without ever having to confirm it using a bank account or a photo ID. No uncaring banker can deny that person the ability to transact using Bitcoin in this case.

What this means for future space colonies is that they’re going to have enough hassles without a banker deciding who can use financial services to do business and when, where and with whom they can do business with. And it will happen if the interplanetary financial infrastructure requires that traders and colonists go through a central bank to do business. Here’s some examples of misbehavior on the part of international financial institutions for those of you who think that it can’t happen. (I am not making these up!)

  • December 2011: Paypal suspended Regretsy’s account after Regretsy raised funds to give Christmas gifts to children living in poverty. Paypal appeared to at least partially reverse its decision and made a donation after a social media backlash, but this is not a unique example of Paypal attempting to derail charitable fundraising efforts and seize the funds – and Paypal may even succeed in the cases that nobody ever hears about. As Grinch-like as that was, this isn’t even the worst example of abuse of the vulnerable by a financial institution…
  • Robert Zubrin had a few things to say about the abuses of the World Bank in Merchants of Despair, the TL;DR being that its founding was a deliberate attempt to financially exploit vulnerable populations with the goal of reducing their population.

    January 2014: The World Bank’s own internal Office of the Compliance Advisor releases the report of an investigation into human rights abuses carried out by a palm oil and food company it had provided funding for. This company had reportedly been complicit in the killings and forced evictions of small farmers in Honduras for the purpose of expanding palm oil plantations. Even the reactions to this news from human rights watchdogs highlighted the leverage that large, centralized financial organizations could have, either for or against human rights violations. A spokesperson for the German NGO Urgewald said of the matter:

    “The World Bank’s investments should improve the lives of local communities, or at the very least not endanger them. This report reveals that in the case of Dinant the World Bank failed massively on both fronts. The World Bank must halt all further disbursements to Dinant until decisive action is taken to ensure justice for crimes committed, and to prevent further abuses.”

    The World Bank’s response to the matter was dubbed “disappointing” and “inadequate” by several watchdogs and this is not the only time or even the first time that the World Bank had been either complicit or directly active in human rights abuses. In fact, it has frequently been accused of contributing to atrocities around the world, including the forced relocation of minority ethnic groups in Ethiopia and abusive rehabilitation practices that included forced labor in southern Vietnam. Some watchdogs who have researched the World Bank’s history of lending practices have accused its founders and senior employees of a highly manipulative lending model that is specifically designed to encourage or enable human rights abuses.

As you can see, many financial organizations do not necessarily have the best interests of their customers in mind, will usually cover their own assets rather than grant an organization that is raising funds the benefit of the doubt, and can actively use their financial clout for less-than-noble ends. This is one of the biggest benefits of using a highly decentralized system like the one created by Satoshi Nakamoto. It slashes the chance that one entity or an elite group of entities can completely control the system in an effective monopoly or oligarchy and, thus, gain the ability to abuse its power without consequences. If one owner of a node and/or dedicated processing power for the network starts becoming the jerk that tries to dictate who can buy and sell on an equal footing with anybody else, it will be easy enough to simply pull the economic plug on that colony and redistribute the requirements of maintaining the cryptocurrency across all the other colonies if necessary. Traders will not visit. Colonists will not do business using its platform – and, yes, as we saw with the Chainalysis case mentioned in the last chapter, it is possible to tell which node that clients are connecting to and whether that node is behaving. Economic sanctions are a thing because no sane head of state will ignore the economic consequences of misbehaving. The same can be true when dealing with a misbehaving provider of financial services when a decentralized system is used.

International Remittances – Coming To A Space Colony Near You

Let’s consider a country with an economy that is driven by the international remittance market. Families in the Philippines receive billions of dollars’ worth of remittances every year from migrant workers that move to other countries to find work. Western Union charges up to US$4.99 to send US$200 from the U.S. to the Philippines, and that’s if the sender wants to have the cash in the Filipino family’s hand within minutes. This is an effective 2.495% fee just for the convenience of sending a couple of hundred bucks home quickly. If the sender wants to pay less in fees, the time it takes for the money to get into their hands can stretch to as long as four days. If the family is relying on that cash to pay rent, they’ll have to fend off the landlord’s threats of eviction for that amount of time. Who needs that?

If the worker can make use of Bitcoin, however, that worker can send any amount of money for only a few cents in mining fees and that digital cash will be in the family’s hands by the end of the day in most cases. Some Philippine-based companies are even creating remittance services that take advantage of Bitcoin’s main selling points: It’s cheap, fast, secure, protects the rights of the recipient, and doesn’t notice that it’s being sent across international boundaries.

This will be a boon for what could become the ultimate market for migrant labor and an “international” remittance market that is spreading throughout the solar system: brand-new and growing space colonies. Also interesting from an economic standpoint is the promise of booming industrial and mining industries based in outer space, especially around the asteroid belt. Imagine being able to sign up for a work contract with a mining company with rigs in the asteroid belt so you can provide for your family. You can insist on being paid in your cryptocurrency of choice and a reasonable recruiter will listen, or the several interplanetary-themed cryptocurrencies could simply become the standard in paying contract workers. This alone would bypass the need for “international” financial institutions that can get away with charging high fees and taking days to get the money into the hands of the recipients simply because those contract workers wouldn’t have very many good options for sending money back to family members that need the full amount in a hurry.

Benefits To Interplanetary Corporations

Large international businesses know about the costs of moving money around. They’re the ones who have to work with international financial institutions to keep the cash flowing. They might be able to negotiate better exchange rates than you could, but you can still be sure that it costs to send money across international borders. If you live in the U.S. and use TransferWise, it could cost you $9.90 to send $1,000 to Europe. They even claim that this is a cost savings to you because some institutions can charge you up to 5% of what you send!

This obviously becomes a problem if you have expenses that include an international payroll. Besides having to deal with international employment regulations, your relationship with employees will go sour fast if they feel like they’re being cheated. If their monthly salary is two thousand Euros, they’re going to expect two thousand Euros and don’t want to hear excuses about exchange rates or money transfer fees. However, if you can pay them in Bitcoin, things become a little more predictable because a monthly salary of 3.36 Bitcoin is pretty much the same thing on both sides of the deal.

Think this can’t be done? Keep in mind that Overstock gives its employees the option of receiving all or part of their pay in Bitcoin. Sure, it might make the accounting a little more complicated, but that’s why the concept of an accounting department was invented. If it seems like a lot of trouble, just keep Bitcoin’s low international transfer fees in the front of your mind, especially if your business routinely sends a lot of money across international borders.

The same idea applies when a corporation has a dozen mining rigs in the asteroid belt and a headquarters back on Earth. Earth might still be sulking from the successful revolt of its colonies by the time this even becomes an issue. Of course it’s unfair to the corporation that it will have to pay for the results of that sulk in the form of increased tariffs and regulations. What can corporation chiefs do short of moving their headquarters to a now-independent Moon?

Actually, the Moon might not be that bad of an idea when it gets down to cases. Now businessmen can work themselves into a better position to take advantage of the fact that colonies still need a source of supplies and would rather not pay the cost of having them shipped from Earth. That’s if they haven’t recognized the way the winds were blowing and made that move already. It would be cheaper to expand a colony using resources from the asteroid belt, especially once the investment in widescale space-based industrial capacity has already been made.

More seriously, though, banks will not be the businessman’s friend during the turbulent time when Earth has to get used to the fact that it doesn’t rule the solar system anymore. It might still be the big boy on the block, but the combined forces of the colonies fighting for independence – plus the few that were never really all that enthusiastic about it but got dragged along for the ride anyway – were enough to force Earth to give them some respect. The finance industry has wiped out people’s retirement funds over much less and businesses that want to protect their liquid assets from getting steamrollered should be moving them into the same cryptocurrencies that the colonies may already be using.

It’s not even paranoia when the banking industry yanked the accounts of Tavex, the largest gold dealer in Sweden, giving a vague reason: “general business decisions.” If it can happen to a large precious metal dealer, it can happen to just about any corporation that doesn’t remain flexible enough to cope with changing business environments, such as Sweden’s apparent wish to do away with anything that resembles physical currency like gold and silver. If a corporation cares about not having its accounts yanked without notice or even giving you much more reason than a “business decision,” that means corporations can legitimately make the “business decision” to move their liquid assets into a currency that can’t be shut down in any way short of shutting down the entire Internet. Running a full node doesn’t even need to be very expensive if a corporation chooses options that allow it to effectively outsource the data processing involved.

Continuing to use traditional banking services is about the only way corporations are going to owe banks anything. Of course the banks are going to throw a tantrum when they realize that they can no longer jerk around with their customers. That won’t matter to you when your corporation’s liquid assets are sitting securely on a server at Fra Mauro and you are enjoying 18 holes at the Alan Shepard Memorial Golf Resort.

This is especially true when you’re doing business in an environment that has no banks. “Take me to your banker” would make even less sense than “Take me to your leader” in the minds of most colonists. They’ll be used to carrying their currency on their tablets if they have any currency at all. They don’t particularly need bankers to process transactions when their server handles that job for them. This might come off as a sneaky, backhanded way to build a financial infrastructure for future space colonization, but it works for colonists who have more important things to think about than where they’re going to put the ATM and may still be smarting from having had to fight off a centralized power structure that relied on banks to manage the funding for the war.

Corporations are in this to make a profit. Nobody who has ever actually run a business will blame corporations for making the existing system work for them even if it means moving to places with a friendlier tax code and regulatory environment. That’s true now when large corporations outsource manufacturing jobs to China for the cheap labor and that will be true centuries from now when the Moon looks like a good place to move corporate headquarters to. Look at it this way, banks are not loyal to even their largest account holders when the chips are down and government bureaucrats don’t like to admit that they are the reason that so many corporations look for tax havens and a friendlier regulatory environment, so why should you care about them?

So setting up an interplanetary banking system might seem like the easy, obvious, and sensible thing to do, but it’s not necessarily the best option in an environment where colonies don’t trust Earth and don’t necessarily trust one another, either. They’ll want options that won’t stick them with a distant third party that holds all the cards and might shut them down simply because they don’t want to take the risk of being a party to transactions that Earth wouldn’t approve of. Workers probably won’t care as long as they get their money and can send it anywhere they like without having to pay through the nose or wait days for a transaction to go through. This should actually be exciting to businesses that are flexible enough to react to rapidly changing economic conditions. Cryptocurrencies might look like Internet funny money to many large corporations right now, but if we all want to participate in an interplanetary economy that will have very little patience for an inefficient financial system, we’ll have to get used to using them.

Some Books To Read

Bitcoin and Economics on eBay