An Invention Leaving 700 Years of Banking History Behind

A Little Bit of Money

Thought Experiments on Cross-Border Payments - Of Couriers, Bankers, and Bitcoiners

Series 12: An Invention Leaving 700 Years of Banking History Behind

The Medici Banking Empire: Boring Accounting

Accounting records were rather unhandy when going back in history. The earliest technological revolution in the development of writing, counting and money are clay tablets dating back to Babylon over 5000 years ago. When the Medici family started out, Gutenberg printing was not around yet. Everything was recorded manually by scribes, and couriers transported coins. The corresponding banking industry we find today is precisely the way the Medici family set it up in the 14th Century. The Italian dynasty used the power of the newly invented double-entry accounting system to build a cross-border banking empire. Their basic, boring accounting method not only made them famous, but it also made them ridiculously wealthy and powerful. It's amazing what a little plain math can do.

Nostro Means “Ours" & Vostro Means “Yours”

The Medicis invented Nostro and Vostro accounts. This distinction allowed for recording credits and debits, making active and passive funds visible on a balance sheet. Banks still use the double-entry system to keep track of who owns what, and who owes what to whom. The Italian words translated to English illustrate how direct it is: Nostromeans “ours” and Vostro means “yours."

Bitcoin is a 21st Century Payment Ledger

The Bitcoin ledger is merely the 21st Century version of the Medici balance sheet – a two-column spreadsheet citing who owns what while digitally recording all the giving and taking. There are about 12 million rows in the Cloud stored on a decentralized computer network. The first row is for each Bitcoin address, and the second shows how many Bitcoins that account carries. In total, there are around 16 million Bitcoins today, with a market cap of around 11 billion dollars. It is a very clear public record of who owns the funds, and in what quantities.

Enough Bitcoins for the Planet

Are there enough Bitcoins in the world? Yes, because Bitcoin is divisible. With only 21 million Bitcoins that can ever be mined, that does not seem enough, but remember that Bitcoin uses eight digits behind the decimal point, and the protocol can be extended. The spot where we place the decimal point does not even matter mathematically. So a single Bitcoin could be split a million times and still leave two digits after the new decimal point, to be used for smaller fractions. Is this enough? Sure. We are talking about 20 trillion units or more than two quadrillion Satoshis that the current Bitcoin can be broken down into.

Consensus and Transparency are Key

Astonishingly, one is not required to pay a third party to keep those accounts. There is no Bitcoin company or administering authority, and no central monitoring of Orwellian omnipresence. The system is entirely composite – all for one, and one for all. Consensus and transparency are essential. Anyone can download the open-source software to send, receive, and store Bitcoins. It is free. Seemingly out of nowhere, banking suddenly takes on a whole new meaning. It took more than 700 years after the Medici family's banking empire started to have the ability to be your own bank. Apparently, this metaphor cannot be taken word for word. For comparison purposes, I argue that an individual can be their own blockchain banker now, but cannot by themselves transact on behalf of others without proper licensing and regulatory controls.

To be continued. Further Reading:

  • F. Reid and M. Harrigan. “An Analysis of Anonymity in the Bitcoin System.” In Security and Privacy in Social Networks, pages 197-223, July 13, 2012.
  • J. Villasenor, C. Monk, and C. Bronk. “Shadowy Figures: Tracking Illicit Financial Transactions in the Murky World of Digital Currencies, Peer–to–Peer Networks, and Mobile Device Payments.” Baker Institute for Public Policy and Brookings Center for Technology Innovation Research Paper, August 29, 2011.
  • D. Morehead. “Will Bitcoin Finally Bring Down The House Of Medici?” TechCrunch. June 14, 2015.
  • D.S. Evans. “Economic aspects of bitcoin and other decentralized public-ledger currency platforms.” Global Economics Group. University College London. April 15, 2014.

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