PMC Bank Issue And Why Crypto is The Solution? – Amrit Mirchandani

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Introduction

The lives of many account holders at the PMC bank were disturbed as RBI instructed PMC to not involve in any money business for six months. As per the RBI statement “depositors are not allowed to withdraw more than 1000 rupees from the total account balance.” Although, later the withdrawal limit was stretched to Rs 10,000 for every account holder and then eventually to Rs. 25,000.

The inefficiency of Punjab and Maharashtra Co-operative Bank is the classic example of the middle-man crisis. It is due to the bank’s own series of mismanagement or fraud, which led the depositors’ money to fall in the spectrum of bad debts.

The PMC Bank issue came into the spotlight when a whistleblower wrote to the RBI on September 17 which was a warning signal for the bank’s dangerous exposure to the HDIL group.

The PMC Bank has been under observation by the RBI after the Madhavpura Bank stock market scam. Both the Madhavpura and the PMC bank cases point out the various demerits that ‘fiat’ money holds. In the Madhavpura case, the risk exposure was to a stockbroker whereas, in the PMC Bank case, two-third of the money was loaned out to a bankrupt and out of business property client. PMC is under the list of top five banks with an outstanding loan amount of 8,383 crore INR.

Why Cryptocurrency Is The Solution?

The very principles of ‘fiat’ also have some demerits to it, demerits that at times could lead to such crises and situations that have disastrous consequences. We must first understand that ‘fiat’ currency is basically a currency that is issued by the government. The value of the currency is not backed anymore by a commodity such as gold — rather the value of the currency depends on the supply and demand and the stability of the ruling government. The government can, at their will, print any amount of fiat currency, devaluing the purchasing power of the existing circulation.

The major flaw of ‘fiat’ currency is in case of its ownership — it requires a depositor to store their money in the bank, and once it is stored there, the ownership of that is with the bank to utilize it or invest it in any way they choose. You have to trust these third parties — your government, your central bank, and your bank to handle it well. This is also giving control of your money in the hands of bank officials.

On the contrary, cryptocurrencies like Bitcoin run on a decentralized blockchain in a trustless environment. So you do not have to trust anyone and the supply rules are coded in a contract, so no one can suddenly increase the supply.

Three factors that stand out here are:

Decentralisation & Digital

Decentralized money does not need to be stored with a third party like a bank. It is digital and does not require a bank account, it is safe to carry in a digital format or stored in a paper wallet.

Fiat requires storage since a lot of physical cash is unsafe to store and every digital form has a middleman that we need to trust. If that entity makes bad decisions and goes bust, the money could be gone.

Ownership

The foundation of ‘ownership’ is based on who actually owns the money. If we consider the case of ‘fiat’ which is the government-issued currency when deposited in a bank account, it acts as a contract that you hold with the bank which says the bank holds your money and in case of bankruptcy due to any reason, RBI stipulates you will only be liable to received Rs. 100,000/- from the insurance. This means you do not own the money stored in your bank. Once it is in their hands, it is at risk.

The control of ‘fiat’ currency is obviously regulated and checked and the RBI maintains insurance with itself. But in a country where the corruption rate and scams are at an all-time high, such checks and balances tend to fail too.

Because it is decentralized, a network of miners and nodes across the globe approve the transactions and maintain a record of each transaction in a secure encrypted way. This does not require a third party. You can hold your tokens in a hardware wallet, a mobile wallet or even a paper wallet. But it is important to note that many cryptocurrency holders store their tokens on exchanges, online wallets and third party sites that act as middlemen. This can be as bad as storing your fiat in a bank, or worse.

Custody

Custody is equivalent to how much control you have over your own money, the very concept which makes us question ‘how can RBI forbid me from using my own money?’ We forget is that we lose control as soon as the money goes into the bank account. Just as in the case of the PMC bank, which was the custodian.

At any time, with ‘fiat’ currency the control is with the bank and the central bank of the country. The only form of control that we have on ‘fiat’ is in the form of cash. Every digital transaction with fiat is merely a ledger entry in the form of a database that can be hacked and controlled by the central bank or the government. Demonetization was one such example.

You are fully in-charge of the custody of your crypto tokens when you hold it in a wallet, offline and keep the private keys safely. This also means additional responsibility because if you lose the private keys, your cryptocurrencies could be lost forever. Or if you store the private keys somewhere that gets hacked, someone can steal it and these transactions cannot be reversed like bank transactions.

Conclusion

The PMC bank case is an example that points to the loophole that exists in the ‘fiat’ currency and central banking system. That is the reason many common people and large investors alike prefer to store their wealth in cryptocurrencies like Bitcoin now. As trust in governments and central banks decline, cryptocurrencies will increasingly become the vehicle for securing wealth.

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