9. 0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
1998
1998
1999
2000
2001
2002
2003
2003
2004
2005
2006
2007
2008
2008
2009
2010
2011
2012
2013
2013
2014
2015
2016
SEKm"CREDIT MONEY” IS THE MOST COMMON MONEY
On demand deposits
from non-bank public
Coins and notes in circulation
SWEDISH MONEY SUPPLY
“Actual money” is decreasing at
the same time as ”credit money”
is increasing
Money
supply
12. ENTER DIGITAL MONEY - BITCOIN
• Decentralized digital currency
• Not backed by any government or organization
• Instantaneous peer-to-peer transactions
• No need for trusted third party
• No counter party risk
• Cryptographic security
• Low cost banking for everybody everywhere
• Inflation proof
• Based solely on the consensus that it has value
13. Distributed ledger – same copy in every node
• The receiver now can spend that amount
• Transaction cost = virtually zero
• Time = ~10 minutes
PAYER
RECEIVER
Receiver’s public
key/adress
HOW BITCOIN WORKS
Long version:
1. New transactions are broadcast to all nodes.
2. Each node collects new transactions into a block.
3. Each node works on finding a difficult proof-of-work for its block.
4. When a node finds a proof-of-work, it broadcasts the block to all nodes.
5. Nodes accept the block only if all transactions in it are valid and not already spent.
6. Nodes express their acceptance of the block by working on creating the next block in the
7. chain, using the hash of the accepted block as the previous hash
8. https://bitcoin.org/bitcoin.pdf
21. BANKS ARE VERY DEPENDENT ON DEPOSITS
Capital
> 1 Year funding
Deposits from households and SMEs
Other deposits
Derivatives
Source: Liquidatum and Riksbanken
10
20
30
40
50
60
Almost 40% of
European banks’
assets are funded
by deposits
Funding of European banks’ assets, %
22. IF DEPOSITS MORPH INTO DIGITAL CASH
• Banks would have to offer higher rates to convince the public to lend them money
• Higher funding costs would likely depress profitability of the banking sector
• Lower bank sector profitability could affect credit ratings which would put upward pressure on wholesale
funding costs as well
• Higher bank funding costs means increased cost of credit for banks’ borrowers
• Higher borrowing costs could impact asset prices like residential and commercial real estate, equities,
bonds, commodities, infrastructure etc.
• Banks ability to “create money” would be materially impacted and as such central banks’ ability to
conduct monetary policy through the banking system will be too
• Ironically, banks could help make the problem worse as digital cash could become a more attractive asset
to keep as liquidity reserve instead of today’s central bank deposits, government bonds and other banks’
covered bonds. Today’s issuers of instruments that are held as liquid assets i.e. governments and
mortgage institutions, could see funding costs go up for this reason too.*
• In the end, we would probably end up with a safer banking system, with less maturity transformation and
higher quality liquidity reserves – the transition could be somewhat uncomfortable though - for banks’
shareholders, holders of impacted assets and highly indebted borrowers that are dependent on the
perseverance of low cost of credit
* 15% of total assets, of banks under Basel Committee supervision, are so called ”high quality liquid assets” according to speech by Basel Committee Chairman Stefan Ingves 2 December 2016