>I can 100% confirm that all money in the world is just literally numbers, and it is balanced by the different federal reserve systems around the world to ensure no one can "create" money without notifying everyone.
How does the system guarantee that nobody's creating money without notifying everyone? Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence? Is it all just a trust-based system, or are there additional controls?
> How does the system guarantee that nobody's creating money without notifying everyone?
This is a comment that's not related to SWIFT in particular.
Every asset (including money) is generally someone else's liability. The money that we hold as an asset is the liability of a bank. Anyone can issue their own liabilities, but you can't create money that's a liability of someone else. For example, I can't go to my bank and tell them I have a million dollars more in my deposit account than I actually do. They're keeping track on their end.
Similarly, a bank can't pretend that it has more reserve deposits at the Fed than it really does. The Fed keeps track of everybody's reserve accounts on their end.
> Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence?
This isn't an issue. The books of central banks don't need to adjust when other banks issue money (i.e deposits).
To be more specific, central banks are allowed to create money. Their liability is /dev/null. It's how they added trillions to their balance sheet during COVID.
Not really their liability is basically the present value of the future which is indeterminate, not null. If the future pain is greater than the present value, or billions printed, then they printed too much, otherwise it was worth it.
You can’t really know for sure if it’s worth it now though.
Yes but my point is that the liability and asset paradigm described still will hold.
It’s simply that the liabilities are held by people who aren’t born or are obsfucated to the point that people don’t realize they are holding them. Inflation is one example
> How does the system guarantee that nobody's creating money without notifying everyone?
Through a series of regulations regarding minimum liquidity/capital [1] and/or reserve [2] requirements.
> Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence?
By requiring them to periodically report on their assets and liabilities, checking for compliance with [1] and [2], and monitoring their reserve accounts.
We have to trust that all the governments of the world, who pinky promised to follow the rules, aren't secretly cheating internally and reporting false numbers to everyone else?
Not sure what you mean, but I think that’s why crypto is so interesting: you have this public ledger that is auditable and where safety is maintained by consensus.
Any time a friend or relatives asks me to explain what cryptocurrency is, the trust aspect must be front and center, axiomatic to the entire ecosystem. There is not a single thing in the implementation that makes sense without first assuming a lack of trust amongst every single party.
This is also why cryptocurrencies can never be made efficient, and will be a blight for as long as they exist. They are the logical extreme of the inefficiencies imposed by a low-trust society[0].
It seems to me like all societies are trending towards low trust. Technology that can work in a low trust environment though can alleviate some of the pain that comes with that though.
Since cryptocurrency was already mentioned recent examples of that can be seen in Ukraine. The traditional financial system there has been disrupted; you can’t get cash out of an ATM. If you have cryptocurrency you can still transact. I think I saw something earlier where a journalist was able to get out of the country by using crypto to buy a used car.
Sometimes inefficiencies are still worth it, especially when dealing with worst case scenarios. Just-in-time manufacturing and global supply chains are very efficient, but when they are disrupted the cost is enormous. Winterizing the energy grid in Texas is expensive and inefficient/expensive, but if they don’t you are accepting that people will freeze in a severe winter storm.
I want to charitably assume that you're not being fatalist, but
>It seems to me like all societies are trending towards low trust.
is quite a starting point to make the rest of your points.
Your example of Ukraine is insightful and valid, but I imagine crypto fans and opponents alike would rather we not descend globally into a state of permanent war, where crypto would presumably be the only tool available to transact.
First paragraph I follow, but how do you get to the point of the second paragraph? Cryptocurrencies are an update on the current system to remove some of that trust.
many PoS distributed slowish databases are currently deployed and process comparable transaction volume to credit card networks while emitting less carbon.
> process comparable transaction volume to credit card networks
Please cite your sources.
edit for people finding this later: Visa and MasterCard do on the order of one billion transactions per day combined. As far as I can tell, Ethereum (proof of work as of today) does about a million per day and Avalance (one of the top 3 proof of stake networks according to Wikipedia) does about a million per day. That's literally one thousand times fewer transactions than the top two card networks. Three orders of magnitude.
Visa's fact sheet[0] says that they processed about 6500 transactions per second on average for a recent 12-month period. A Solana dashboard[1] says that Solana processed about 2700 transactions per second on average for a recent period of a few hours.
If we would like to pick nits, we could say that the Visa transactions are not comparable to the Solana transactions because Solana transactions let users run complex programs that Visa does not, or that Solana transactions are not comparable to Visa transactions because nobody accepts SPL USDC and everyone pays out the nose to accept Visa, or that 2700 is a lot less than 6500, or that the 6500 number is misleading because the load should have peaks, and do we really know how much peak load Solana can handle, or that only about 1/3 of the Solana transactions are actual useful stuff for users and the rest are consensus messages. But my point is that these things are only "too slow compared to Visa" by a reasonably small factor now, like 6500 vs 900. Thanks.
With lightning you can have infinite tx per day while having final settlement. In contrast Visa and Mastercard have delayed settlement and operate on many layers of trust
With lightning you can send many txes per day to people who already have as much bitcoin as you want to send them, have their wallet online as you send them the funds, and regularly check in to contest fraudulent channel closes.
> Yep! This is the fundamental "disruption" blockchain tech introduced. It doesn't require trust.
Not a native English speaker, so I may miss some nuances, but can you explain how you do not need trust that you find tomorrow someone fool enough to give you something valuable against your token? Where else does the "store of value" come than trust that there are greater fools tomorrow?
Surely this can only be true if a blockchain based currency can replace fiat currency end-to-end. The moment any part of your economy is reliant on the exchange of (say) BTC back to fiat, all the attributes and constraints of fiat come back into play.
>But most scientists trust the peer review process
We really don't. There's so much stupid stuff that gets published on the daily.
And then, you publish a paper refuting a lot of the nonsense, and people start citing your paper as evidence of the opposite of what you wrote, just because you had a keyword in your abstract and they didn't read it, just needed a citation. It's mind boggling that we aren't going backwards in science.
Agreed. When I was doing science, we had a weekly lab meeting where one of our lab members would pick a piece of published literature in our field and break down how bullshit it was. It's hard to do good science.
Sure, trust is a shortcut we use to not do hard work, and free our time to do more useful things that constantly check on each other. That's fine.
But it is critically important that we can periodically check in and verify that our trust is still well placed, and not have systems that can allow someone to massively profit from violating people's trust.
The stronger those foundations and verifications of trust are, the better off we all are as a society.
I never suggested that every scientist independently and recursively verify every piece of previous work. Work and verification of work builds on each other. And every once in a while, we have a major milestone that verifies that much of the work that went into accomplishing the milestone (such as the moon landing) is generally correct.
That's how we teach science to people. It's not just "here's the math and the science we know and it's totally right, just trust us bro". We say "here's the math and science we think is right, now let's do experiments along the way to periodically verify that the things we're teaching you actually generate real predictions that match reality".
Science is all about being suspicious and verifying. Many (if not all) of the greatest scientific discoveries came from people questioning the established "truth".
> Work and verification of work builds on each other. And every once in a while, we have a major milestone that verifies that much of the work that went into accomplishing the milestone (such as the moon landing) is generally correct.
Right- that's called trust. I can't independently launch my own lunar program, so I trust those that did... did.
"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." -- Satoshi Nakamoto
And yet countries have tamed his "anti-fiat" currency and make virtually all of the advantages of bitcoin useless. Bitcoin basically the walking dead right now.
Fiat currency here is obviously being used to refer to currencies created by government decree.
Plenty of other moneys come into existence emergently, most obviously gold and silver without any authority mandating their use. Money is an emergent property of human society, not a gift handed down by our divinely established kings.
The idea that money can only exist by government decree is patently absurd.
Money is whatever thing human society decides to collectively value in order to more easily trade goods and services across time and space.
Money has been and continues to be many things, from government decreed currencies, to gold and silver, to cigarettes in prisons, to sacks of salt paid to Roman soldiers (etymology of 'salary'), to the colloquial "I owe you one".
Money is just debt and favors and can take an infinite number of forms depending on the environment and needs of the people using it to more efficiently collaborate.
I think not quite just debt and favors. In my mind at least the key differentiator is that with money, I can take some money from Paul for some good or service, and expect to be able to get a similarly valuable good or service from basically anyone for that same money.
If I give Paul a loaf of bread and in exchange he writes "Paul owes you one" on a piece of paper, that's money. I can trade that with someone else for some good or service and we'll have to haggle over how much "one" favor from Paul is actually worth.
The dollar is just "the US government owes you one". How much is "one" worth? That's for the market to decide, and largely depends on how much real world goods and services there actually are along with how many "ones" the US government has issued. Although, before 1971, it was explicitly defined as "for every 35 'ones' you have, the US government owes you 1 oz of gold". Now, the value of "one" floats in the market and is constantly devalued by design.
In recent days, the world's markets have decided that "the Russian government owes you one" isn't worth nearly as much as it did last week.
Commodity money like gold or bitcoin don't rely on trust in a government's ability to pay it's debt, but rather trust that a sufficient number of people will always desire the commodity for whatever reason. That's still debt, but more a more indirect, coercion free form of debt.
For gold, that reason is because it has a long history of established scarcity and has some utility as jewelry to signal wealth to others.
For bitcoin, that reason is because it has theoretic perfect scarcity, can be instantly transferred to anyone on the planet with a phone, can be stored in your brain by memorizing the dozen words of your seed phrase, and many other fascinating programmable properties that have yet to be fully explored.
Money has lots of properties and you seem to be struggling to understand 2 fundamental ones.
Money is a) fungible, 2 units of the same money are worth the same thing and b) general applicability. You can use money as a medium of exchange most places.
Brent crude futures contracts are fungible at the monthly contract value. I can literally swap 2 same month contracts with no change in count. I can’t buy coffee with them though (or even Brent crude oil without a lot of toil).
MasterCard debt is generally applicable. It’s spendable all over the world, but I can’t trade it for Amex debt without a conversion.
That makes money status contextual but not undefinable. Rubles are not usable where I live. That means they aren’t money here, I have to fx them, but they are money somewhere else, even places where the government says they are not, like Brighton Beach.
Long story short, you must have external validation of value for something to be money.
Yes, it’s all trust based. I.e. if some random bank in Iowa decides to just create $10,000,000 out of thin air, the Fed will eventually find out and then they would lose banking license, lots of penalties.
Same goes for countries. If a countries fed just creates new money out of no where and acts as if it’s always existed they risk everything. I.e. losing access to the global banking network, insane currency fluctuations, use your imagination.
The premise is the same though. Our entire financial system as it stands today is based off of trust with auditing oversight and harsh penalties for breaking that trust.
It seems like the linked regulation is not yet implemented. Further, your response to a question about a guarantee is regulation and reports? How does anyone know the reports of another central bank are true? When a central bank fakes numbers, what are the consequences, if any, and who adjudicates them?
Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 1 January 2022 and then again until 1 January 2023, in the wake of the Covid-19 pandemic.
> Further, your response to a question about a guarantee is regulation and reports? How does anyone know the reports of another central bank are true? When a central bank fakes numbers, what are the consequences, if any, and who adjudicates them?
Money, especially fiat money, is a social construct. The conformance with and violation of it is therefore within the domains of law and politics.
> How does anyone know the reports of another central bank are true?
Monetary theory is not my expertise, but I'm curious how a central bank report can even be "false" (assuming it is issuing fiat currency and isn't falsely claiming to be backed by foreign reserves or commodities, for example).
> How does the system guarantee that nobody's creating money without notifying everyone?
Simple answer is balanced books. Longer answer is public reporting and reconciliation.
If a bank shows its Federal Reserve balance at X on its asset side and the Federal Reserve shows its bank balance at 0.9X on its liability side, that will raise issue on reconciliation. The system lazily evaluates, however, which makes it nimble but also corruptible--if that bank never tries to spend that money, it may not come to light until audit.
So, the bank can't flip a few bits in its databases and go "actually I have a quadrillion dollars now" because other people know how much money that bank should have based on transactions it has made? Do I have that right?
Seriously I have wondered about this for decades. I don't know why this would be obvious to anyone.
> other people know how much money that bank should have based on transactions it has made?
Approximately. Everyone keeps a running total of their bilateral transactions. This summing and sharding reduces information. But it also decentralizes accountability in a robust way.
Add occasional audits (which allow trusted persons to evaluate the transaction record), and some of those parties' books (in the aggregate) being public record, thereby permitting every party (including third parties) to compare their books to theirs, and you get a system which tends towards accuracy.
The system can’t do that. As a matter of fact I know someone who works for a French bank, and they fucked up and created a bunch of money. They had to work overnight with a bunch of accountants going through the books to make sure they reverted everything.
EDIT: apparently they use some old XML protocol, where twice a day a correspondant bank send them a list of accounts to debit or credit. They didn’t send something once, so my friend’s bank just replayed the previous settlement list.
I read the other responses to your question, and I feel like they're all using complicated language and are still ambiguous.
Can we have a simple "for dummies" answer that explains how does the system guarantee that nobody's creating money without notifying everyone in practice?
Is there some kind of a public ledger? Do banks automatically broadcast their money creation operation to other banks?
Well the simple way to look at this is that usually when you transact with another bank, you're required to have an account at that bank. Just as a consumer can't magically change their balance, a bank simply can't magically increase their balance at other banks. To perform increased transactions, you have to send money to that bank.
How does the system guarantee that nobody's creating money without notifying everyone? Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence? Is it all just a trust-based system, or are there additional controls?