So I open up a bank on Naru. Since no records are required, why can’t I just invent money in my electronic accounts and transfer it to more respectable banks, allowing me to spend it? I assume there’s some real answer, but I don’t know what it is.
What makes you think no records are required?
A bank balance is expected to be the same as the total of all transactions that have ever happened to that account - and those transactions are always expected to have two sides - i.e. one number somewhere increases by the same amount that another decreases.
Of course, that’s not to say that electronic accounting systems are infallible, or that it isn’t possible to cheat them by some obfuscated method, but basically, if you just increase the number representing your bank balance, it will be detectable as a variance between the balance and the total of transactions, or a variance between where the money came from and where it went.
In terms of pure database design, it is often considered improper to discretely store a calculated value such as an account balance, so it may be that some, many or or all banking systems in fact only show your balance as a calculated result of the total of all transactions.
-In which case, the only way to change it would be to insert a transaction, and that transaction needs to have balanacing credit and debit sides.
Mangetout’s answer is technically correct but doesn’t address your main point.
The real issue is that your bank (Cardinal Bank, hence CB) doesn’t give any other banks reason to trust that CB’s currency is worth anything.
To oversimplify, currency is nothing more than an IOU that everyone agrees is valid. If CB (your bank) has tons and tons of gold sitting in a vault and every CB dollar is worth X amount of gold, other banks will likely take your CBs and convert them to whatever currency you want.
A real life example of this is WOW gold. WOW gold is not backed up by anything except the fact that people will pay “real” currency in exchange for WOW gold. Thus, there are banks (using a broad definition of bank) that will accept WOW gold in exchange for other currencies. WOW gold only has the value people assign it.
So if Cardinal Bank says “Hey I have 10 million Cardinalbucks!”, the real barrier to using CBs as currency is only that other people believe CBs are worth anything.
Thus, your question about counterfeiting as two simple answers.
First, does the other bank/nation/investor consider your promise worthwhile?
Second, if so, are you actually making the promise or is someone counterfeiting your promise?
The first part is explained above. The second part depends primarily upon encryption. If you have some way to authenticate yourself and other banks trust you, you’re good. Encryption in the case of electronic money means nothing more that “I am who I say I am”. (Encryption might be the wrong term, but this is sort of a thought-experiment-olnly realm so far.) If you use crappy encryption and people can fake out other banks, that will soon lead to no one accepting that your currency is worth anything. With strong encryption, your promises (aka currency) are uncounterfeitable, thus the value of your currency still only depends on how much others trust you.
So the short answer to your question is that no one is going to trust Cardinal Bank without you showing you have some sort of real value; in other words, you have to prove that your promises issued via currency have value. Encryption is how you keep your currency valid – that you make sure the other bank(s) know your currency was issued by you, the trustworthy bank, instead of vlad the russian hacker.
But really, every bank and every currency is based on some sort of promise that it has value. Even if the value is not based on physical goods (the US dollar or WOW gold), this promise is the basis of all currency.
I believe there’s some sort of threshold of proof that any bank has to provide to join the banking system and pass around money as electronic chits.
Often this also involved certification of some sort by the local country’s watchdogs. Also, if an area is known to be questionable, the banks accepting your CB’s will want some sort of assurances (bonding? Certification? Deposits with other known banks?) to ensure that they don’t get left holding the bag.
The recent banking collapse and rescue was specifically due to this. When a MAJOR player in the banking world was allowed to go under, basically everyone who had a negative balance with them was SOL and lost money. Suddenly the scenario you ask about hit everyone - how do I know BoA or Bear or whoever is really good for all the money we hold? Especially since, in the days or weeks leading up to a bak going under, odds are it becomes a sinkhole desperately spitting out IOU’s. Suddenly no bank wanted to play hot potato, so the bank system ground to a halt.
Up until then banks habitually bounced IOU’s back and forth to keep things running. As things ground to a halt, nobody had the liquidity (spare money) to issue loans or extend lines of credit, which would cause other businesses to not pay their bills; plus a lot of the parked assets like bonds were suddenly worthless, meaning many honest loans no longer had the backing they were supposed to have.
Because nobody trusted anyone else the US government stepped in and became the lender for all those banks, so they could be sure they were going to be paid back. Meanwhile, they had to untangle which of th assets were worth anytihng and who was seriouslyin the hole.
OK, so my current balance is only a calculation from the transactions in my records. (I’d still like an explanation of the differences in record keeping in Naru, though.) How hard is it to insert deposits in my records? Is anyone actually checking that there’s a corresponding debit at Vladimir’s First National Bank and Grill?
I guess my attitude and suspicions come from the idea that everything I know of in the music/entertainment industry has been hacked, and that’s from the outside. The temptation to hack the system from the inside somehow for so much more profit must be enormous. Maybe there’s a point that you can abuse it until no one trusts you and the system collapses, but you can either stay under the radar by not attracting too much attention, or move on to your new shell corporation, which opens another bank.
The USA banks are all tied into the Federal Reserve system. In this way you can think of the Federal Reserve as the master bookkeeper of money (both hard currency and digital). It would be near impossible for a rogue bank to create fictitious deposits undetected by the Federal Reserve. If a disgruntled computer worker with security clearance tried to add a few dollars here and there to various bank accounts, he would be detected.
To do what you’re describing, it would have to be an inside job at a higher level – the Federal Reserve itself. Then the question becomes what kind of internal controls keeps that from happening. My guess is that the major member banks controlling the Federal Reserve audit each other.
OK, but what about my personally founded bank in Naru or the Caymans? Is there real checking going on to match the debits with the credits? If I could invent credits to my account there, then there would be a “correct” debit for the deposit to a US bank.
I admit there probably is strict control, because I’ve not heard of it being caught. I just thought that maybe I wasn’t reading the right things. I’m not anywhere near the banking industry.
On a related note, how are these drug dealers and mobsters banking their profits? I guess there are banks that really don’t ask questions if you bring in duffel bags of cash. Is this how it’s done? My source is the documentary movie “The Firm”, with that scholar Tom Cruise.
I presume you mean Nauru. If you open up a bank in Nauru, you need to do so under the Banking Act 1975, which seems to require the keeping of records: if you didn’t, you would be keeping the Registrar of Banks happy.
But to create the bank in Caymans, you have to have real assets. If Caymans had very light regulatory enforcement of their banking system to allow you to create banks out of thin air, a few things would happen: #1 they’d be kicked out of the IMF and #2 the global trading for their currency (KYD) would plunge because its integrity cannot be trusted.
There are several barriers to injecting fictitious money into the worldwide money supply. Although you can bet if someone like you is thinking about ways to do this, there are other criminals trying to do the same thing with clever mechanisms trying to outwit world banking system. Likewise, there are constant bank security procedures and audits that try to stay one step ahead of the criminals.
There are also ratings systems (Standard and Poor’s, Moody’s) which banks use to evaluate other banking organisations - without a suitable ranking, noone will trust you for your electronic transfers.
Nauru has a very lax banking system coupled with strict secrecy laws, and **Cardinal **is correct - it takes very little in the way of documentation and infrastructure to set up a private bank there (just money). However, to interface with the real banking system requires a trusted interface - a clearing hose to monitor transactions in and out and hold collateral on transactions in progress, and some trusted partner banks around the world. You can be as lax as you like, keep your records on post-it notes and create all the private money you like, but no-one will exchange it for real-world money until you can convince them that it has real value. And until you can prove that (by audits, proof of initial transfer, etc) you are out of luck.
What Nauru can be used for is laundering real money of uncertain origin into money that can be used without questions being asked - the russians have pumped millions through Nauru, with enough hard currency greasing the officals to make many questions disappear.
Of course, if you are a Central bank, you can do this all you like - Quantitative Easing. :rolleyes:
Si
While I’m certain that an attempt to create money ex nihilo would soon be caught, I wonder if it would necessarily be caught fast enough. That is, if you could extract fifty million in cash through some scheme, and be on your private plane out of the country half an hour before the alarm bells went off.
Let’s say you deposit $10,000 cash currency at your bank in Noru.
Customer (perhaps you) has an electronic balance of $10,000.
The bank has a liability of $10,000.
The bank has a cash currency asset in the vault of $10,000.
Customer (perhaps you) decides to wire transfer that $10,000 to my bank account in Thailand. Why? I don’t know, I gave him some advice.
Now. Your bank in Noru has now satisfied its liability to the customer.
What happens to the cash currency of $10,000?
The Naru bank will need to send it to the Thai bank to complete the transfer of the account balance.
Are you positive on that? Or is that a central bank settlement thing?
The Noru bank can’t transfer the deposit balance of one its customers without transferring the associated assets with it, either in the form of a payable to the corresponding bank which it must ultimately settle with the payment of the currency, or a direct transfer of the currency.
Otherwise the bank’s books won’t balance.
“Transfer it to more respectable banks,” that’s the weak spot in your scheme.
Give me precisely the step-by-step process by which you will “transfer” this money.
I mean do you think you are going to send an email to customer service at Mega National Bank and say “I hereby transfer $1,000,000 to you”? How exactly do you envision this process of transferring money to work?
Generally, a tiny bank somewhere that wants to do international transfers is going to do it through a larger “correspondent” bank. The tiny bank sets up an account at the larger bank and then when one of Tiny Bank’s customers comes in to do an international transfer, Tiny Bank sends a secure message to the larger bank asking them to complete the transfer, taking their money out of Tiny Bank’s account at the larger bank. If Tiny Bank does not have enough on deposit, the larger bank will not complete the transfer. (Alternatively, they can set up a line of credit at the larger bank if the larger bank deems them to be creditworthy.)
And here’s the key point: internal electronic bookkeeping entries are useless outside the bank. If Tiny Bank wants to deposit money into its account at Larger Bank and says “we’ll make an electronic entry in our records crediting you with the money!” Larger Bank says “Get serious.” Larger Bank will demand that you transfer reserves to its account at the central bank to fund your account. When you call up the central bank and say “I want to transfer reserves to the account of Larger Bank,” the central bank will say “Do you have an account with us?” Tiny Bank will say “No, but I will create electronic money on my books.” Central Bank will say “Stop bothering us. <click>”
Unless you can get the world to agree to accept electronic credits on your internal books as a universal form of payment, they are useless when it’s time to try to move money out of your bank. You have to present the outside world with a form of payment that they are willing to accept. With inter-bank transfers the form of payment that they are willing to accept is generally credits from their central bank. And the central bank is not going to create credits for you just because you made an electronic entry on your books.
The “customer” has no ability to somehow wire $10,000 to your bank account in Thailand. He has to request his bank to wire $10,000 to your bank in Thailand together with instructions that the amount be credited by your bank to your account.
Generally, international transfers go through a chain of intermediary banks. When the Noru bank sends the wire request to the first bank in the chain, it will go no further until that bank is satisfied that Noru Bank is going to pay it for the transfer. If the intermediary bank is not willing to extend credit to Noru Bank, Noru Bank either has to already have $10,000 on deposit at the intermediary bank or arrange to have $10,000 transferred to the intermediary bank before the wire transfer will proceed.
How do they get the $10,000 in paper money to the intermediary bank? They could have a messenger take it over (unlikely). They could have another bank where they have $10,000 on deposit (or in a line credit) wire transfer it to the intermediary bank. Or they can send the $10,000 in paper money over to the central bank which will credit its reserve account for $10,000 and then have that money wired to the intermediary bank.
So the bank either has to deliver the $10,000 to another bank, keep the $10,000 as vault cash and deplete its account somewhere else by $10,000, or incur $10,000 in debt.
If it depletes its account somewhere (another bank or the central bank) by $10,000, then it has reduced its assets by $10,000 which balances the $10,000 in cash in its vault.
If it incurs a debt to pay for the wire, the debt becomes a liability which is balanced out by the $10,000 in vault cash.
There are state agencies that perform regular audits. The insuring agencies (FDIC and NCUA for banks and credit unions, respectively) also perform regular audits.
Further, one of the many requirements of becoming an regulated (and thus, accredited) financial institution is the use of industry-standard software to track your balances. It’s not like you get to just run an excel spreadsheet. And making money magically appear in standard software is not really something you can do. There are balancing requirements that are not trivial to bypass.
** Alley Dweller** nailed it. Banks create money out of thin air all the time, and legally. They can do that because money in a bank account is not a commodity of which there is only a limited quantity around; it is simply a liability owed by the bank to the account holder, and the bank can create such liabilities at will. If you go to your bank where you have your account, and apply for a loan, and the bank gives you the loan, then the bank will create money by simply crediting the amount of the loan to your account. It’s not like - as many people wrongly assume - they “take the money out of someone else’s account” or anything like that. The bank disburses the loan by simpling changing the figures that represent your balance in its ledgers or computer systems. There is, at this stage, nothing behind these figures.
The pivotal issue, however, is that these figures represent liabilities of the bank. These liabilities are something the bank may have to service. If you withdraw your money in cash, the bank will have to fork over banknotes representing the amount withdrawn. These banknotes are printed and issued by the central bank of the country in question, and the bank cannot create central bank money at will; it needs to obtain it and hold a sufficiently large liquidity reserve in store to meet liabilities as they fall due. Likewise, if you transfer the money from your account to another account at another bank, this will lead to a flow of cashless central bank money, i.e. credit the bank holdsw with the central bank of the country in question by means of central bank-operated payment systems. That’s why banks need to maintain elaborate liquidity management systems, and meet regulatory liquidity requirements, to be able to meet their liabilities at any time.
The question was if you owned the bank.
On an electronic transfer from Honduras to Nicaragua, I do not think they are mailing physical cash as backup to the electronic transfer. Is there an accounting balance mechanism via the central banks of each?