My proposal to create a new Banking System

Published July 2nd, 2009 edit replace rm!

Last week I gave my talk on Agile Banking at Reboot 11. This week I have taken my talk and turned it into a series of blog articles that I will post here once a day.


We should create simple limited banks or funds. These should only be allowed to do one thing.

A fund has accounts signifying value. Value could be just about anything: Cash, gold, stocks, bonds, loans, insurance, service credits.

Ecurrency banks should replace current accounts. An Ecurrency is a non interest bearing cash mutual fund. No fractional reserve no risk. They could make money on transactions or subscriptions. They could even be implemented as a cooperative of account holders. SWIFT is a cooperative of banks, I say get rid of the middlemen.

Mutual funds fit right into this model for investments.

Loans could be handled like the Danish mortgage system. Danish mortgages are bonds issued by house owners underwritten by the Mortgage institutions. The Mortgage Institutions themselves aren’t allowed to invest in these loans to reduce risk.

In my proposed system borrowers issue bonds into the loan fund. Each loan fund specialize in specific types of loans. Borrower buys back bond to repay.

There are lots of opportunities for small startups to invent new services:

  • p2p lending
  • micro lending
  • community currencies
  • micro stock offerings

Be transparent

Offer realtime data feeds. The technology is even better for this now than when e-gold did it. We have no excuse not to. This would allow third parties to dig into our data and analyze the data, which again allows mass auditing. Problems will be found much quicker than regulators ever would be able to.


Only offer one type of service (payments, savings, loans, insurance – pick one). Limit size of accounts, limit amount of accounts.

To ensure transparency and avoid non core vested interests be focused:

  • NO IT department
  • NO customer service staff
  • NO branches
  • NO internal accounting

All of these can and should be outsourced to trusted third parties. This creates trust in a way that a small startup never would be able to do alone. Owners can’t cook the books.

You could take this to the extreme. Imagine 3 different service providers for the same payment service. They all process the same transactions. Differences can be flagged (twittered) instantly and automatically.

What about regulators?

Right now they are truly an obstacle to innovation. They go by the belief that big is safe. They make it hard for small innovators to register.

An electronic currency service needs a minimum of €350,000 minimum capital reserves in the EU. Try bootstrapping while following their rules. Banks need much higher. They just reduced this from €1,000,000 as they themselves noticed that only a couple well capitalized people had registered under the law.

A reserve is simply speaking the cash that is meant to ensure the value of your financial products to your customers.

Formula over arbitrary limits

Technology and simple math provides us a much better way

reserve = circulation

The circulation of a currency is the amount of it held by it’s users. So if we have a small bootstrapped community system of 10 accounts with an average €100 balance:

10 accounts *100 euro = €1000 reserve

This is simple, scalable and has zero barrier to entry.

Terrorists, drug dealers, tax evaders, oh my!

Are you aiding and abetting evil money launderers? Regulators say “know your customer”. You are legally obliged to verify who they are and where they live.

But how do you check id online? The most common approach for online services is to fax/scan and submit id’s. Individual countries might provide country specific approaches.

This is a huge barrier to entry. You need to worry about it as you really don’t want to end up like Doug. I believe the solution is a common sense approach:

The smaller the account, the less you need to know.

How do I know you anyway? How do I know you’re not a bad guy? How can I trust that your faxed ID isn’t fake? Your national ID number does not tell me anything. The unsaid truth about “Know Your Customer” regulation is that it is meant to protect you from regulators and not you from bad people.

Why not use social networks? Experiment with page rank like algorithms and webs of trust. It could turn out better than national id’s
One thing to remember though is

I know you!=credit

Just because I would be happy to tell facebook or my bank that I know you, doesn’t mean I want to lend you $1000. However as long as we remember this we could use it to bootstrap an alternative credit rating system.

What about risk?

We must accept but limit it. People will eventually lose money. However the design of this system firewalls the risk into certain areas.

If an ecurrency goes bust you can’t lose your money as it is held in the reserve. Government bank guarantees are no longer necessary. Bank runs are not possible as anyone who wants their money can always get it out.

Risky investments only affect their direct investors.

In tomorrows post I will cover practicalities of to implement this including ideas on technologies to use.

Earlier this week I wrote about Risky Business the core problem in todays financial services industry, Benches, Coffee and Bubbles about the origins of financial innovation and about Douglas Jackson of e-gold who has been one of the most innovative people in the financial services space.

These were all based on my Talk about Agile Banking that I gave at Reboot 11

Posted July 2nd, 2009

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david nicol July 3rd, 2009

Pelle, please e-mail me; I have your system shovel-ready.

miles thompson July 13th, 2009

Thanks Pelle for all these posts. I wish I was anywhere near Copenhagen as I would’ve loved to take part in this discussion.

I love most of what you suggest, simplifying, open transparency and zero-touch administration and formulas over arbitrary limits, all sound like great ideas.

My only (hopefully useful) criticism is that whilst it is true that no fractional reserve means no risk, it also means that you would continue to cede the creation of new money/new currency to that part of the economy that is willing to tolerate fractional reserve banking (ie the mainstream banking system).

In that sense, as an alternative to banking its a bit like an alternative to currency where you have to purchase that currency using ‘normal’ currency first. That makes that currency not much more than a type of gift certificate ( In contrast for example to LETS or Ripple or commercial ‘barter’ or other alternative currencies where new currencies are created outside of the main system. A bank with 100% reserve (and no other means/system whereby new credit can be created) kind of like a bank that is not really a ‘bank’ at all but rather an investment vehicle. No matter how innovative.

I’m all for transparent management of risk (and quite like the idea of ‘traceable’ money) but think that we’re missing something here still.

Perhaps I am exaggerating a bit to make the point but hope I got the point across. Love to hear your thoughts.

David Nicol, I’d love to hear about this shovel ready system too. Are you the David Nicol of TipJar fame? (You can contact me via utunga gmail if you want).

Thanks again for the great blog.

mansoor h. khan September 18th, 2009

A Radical Solution for America’s Insolvent Financial System
The core problem of the United States’ banking system (and maybe the world’s banking system) is not liquidity but insolvency. The liabilities of the United States’ banking system exceed the value of its assets. The issue is not only the toxic assets (toxic mortgage backed securities, toxic commercial real estate loans, sub-prime mortgages, alt-A loans, adjustable loans likely to go bust, increase in prime mortgage default rates, etc) but also off-balance sheet liabilities (such as expected huge unaccounted for future derivatives losses).
This means that bailouts are just beginning and will require bigger and bigger sums of taxpayer money as time goes on. The government will resort to borrowing more and more and eventually to printing money when treasury debt auctions start failing. The end result of this path is a currency collapse and probably total chaos as expected by gold bugs.
One other way to deal with this issue is to stop the bailouts and let the dominoes fall. Defaults and cross-defaults will cause many, many depository institutions (even very large ones) to collapse leading to extreme decrease in money supply as bank deposits are destroyed. Deposits of failed banks cannot be used to pay bills, make purchases and/or service debts.
Which will probably lead to even more defaults as unemployment increases and debtor’s are unable to service their debts. This process will probably cause extreme deflation as businesses lower prices in a bid to survive. This will also lead to wage cuts, increased unemployment and a deflation spiral and much chaos. But probably less chaos than a currency collapse.
Is there a better way?
Here is my idea:
1) We essentially need an orderly bankruptcy and liquidation of the United States’ financial system.
2) I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This “transfer” is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the FED.
3) Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
4) All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
5) After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have “free banking” from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
6) The new government bank will act as an electronic “piggy bank” only. All deposits will be 100% reserve and it will not make any loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government owned bank exists only as a “safe” money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
7) Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
8) We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).

Mansoor H. Khan

TANCREDO HERRAN November 4th, 2009

I think this is a great idea many share and would like to see applied. I personally love to take the power of the banks and of its influential men and women who are taking the lives of millions in their hands with no remorse and using that power not to create and construct or build up a better human race, rather the contrary. they are making people on their image, heartless, souless, pityless, crul and spineless. I reckon we can begin this systema of banking without banking, by getting people who think alike together. Let’s give a try I’d love to help. The first banking system ruling without banks, and no money as we know it today. Drop me an answer and we can start this rolling up of ideas. Cheers!

Conrad Drury December 5th, 2010


“to kill a snake—attack the head”


1. Change the money system in every nation to one where the value of the currency does not vary.

2. Create a Public Banking system and change the money system to a non-debt one where the government of each nation has sole authority to create money or inject it into the system.
3. Eliminate all private economic activity where the use of “money” does not directly involve the production, procurement, etc of some product or non-financial service except a stock and bond market and business insurance companies.

4. Establish an international protocol where the base currency unit of each and every nation can always be traded on a one-to-one basic with the base currency unit of any other nation.

5. Establish in-country firm price ceilings on every item and service necessary to produce, procure, etc. any and everything needed to sustain human life.

6. Include a firm and fair profit margin for any entity that uses its wealth or labor in the production, procurement, etc. of anything needed to sustain human life.

7. Establish a full employment program in every nation so that every individual can contribute to the general welfare in some way and receive enough money on a regular basis , in return, to be able to buy all the necessities for life, all the time.

8. Focus all non leisure human activity (FIRST) toward education , democratic government, religious tolerance, elimination of all offensive military capability, protection of all natural resources ,the environment, and satisfying the worldwide need for food, clean water, proper housing and the control of disease.

The idea of “debt” is only a smoke screen—thrown up by a controlling few, in order to subjugate the masses! Any sovereign nation can create a “money” system (free of debt)that will make it possible for it to fund any and all programs needed by its citizens.
The system controlling the world today is one that benefit’s a few at the expense of the many and is the cause of most human suffering from poverty, hunger, and uncontrolled disease. It is destroying the environment and causing the early death of at least 28,000 children every 24 hours.

The necessary changes listed above will not limit personal initiative or prevent any one individual from becoming wealthy but they will make it possible for all to always have the necessities for life. Each and every one of them can be accomplished , and if we as human beings are actually above the animals; they will be!

Mario Roper June 20th, 2012

The thing is one part of the ripple effect which caused the economic decline in the U.S. was the huge amount of consumer debt. I believe the country has to be reconstructed starting from within banks in the nation. To add or create new innovative measurements to help safeguard the consumers on getting a loan.
Foe example there are two common ways in which consumer can be created a loan.The 1st is credit score look-ups and the second is collateral loaning which cant determine good recipients for a loan. Both common ways don’t show the consumer money managing behavior.

About me

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My name is Pelle Braendgaard. Pronounce it like Pelé the footballer (no relation). I live in wonderful Managua, Nicaragua. I work with Clojure, Bitcoin and Ethereum.

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