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UPDATE: On October 12, 2019, just a day after I posted this, Visa, Mastercard, Stripe, and other companies have also pulled out of the Libra Association. This is huge! Their reasons for doing so have more to do with threatened regulatory scrutiny. It makes what I've written about below a little more interesting!

The recent news about PayPal pulling out of the Libra Association as well as the association’s head of product leaving has re-piqued my interest in the Libra coin. I’ve wanted for a while now to write about Facebook’s Libra, but I didn’t know if I would be able to write anything about it that hadn’t already been mentioned elsewhere. Then, this past week, while listening to an interview with Brad Garlinghouse, something clicked.

I’ve always been at a loss for why Facebook would create Libra. It seemed like a very strange move for a company that seemed to prefer buying out other companies and properties rather than create everything themselves. And so, in this blog, I want to look at some of the problems inherent in blockchain cryptocurrencies, analyze whether Facebook’s Libra can solve them, and see what else we can come up with in the end.

What is Libra?

On the surface, Facebook proposed Libra digital currency isn’t a competitor to mainstream cryptocurrencies like Bitcoin and XRP. The Libra coin, while not stated as such in its white paper, is a centralized stablecoin, meant to be “backed by a reserve of assets designed to give it intrinsic value”. The assets mentioned thus far to back the Libra coin are the US Dollar, the Euro, Yen, British Pound, and the Singapore dollar, with most of it being backed by the US Dollar.

I think it’s important to keep in mind how successful Facebook has been in the past with most of their projects and acquisitions. Mark Zuckerberg, co-founder, chairman, and CEO of Facebook, is known to see himself as a sort of pupil of the late Steve Jobs. In the same way that Apple makes their products appealing to consumers through design and aesthetics, rather than the best and most recent tech, Facebook has also monetized and created near monopolies with easy-to-use and efficient UI and UX for their software. In other words, it doesn’t really matter that the Libra isn’t a decentralized cryptocurrency. If they can sell it to their massive audience as something akin to new blockchain tech, then they may very well succeed and replace Bitcoin and various other crypto’s.

How does it compete?

In order to see how the Libra is meant to compete with more popular cryptos, let’s look at what Bitcoin was originally designed for.

In its infamous 2009 debut, a person of group of people under the pseudonym Satoshi Nakamoto detailed out the creation of a digital coin which was meant to be a “purely peer-to-peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution.” Thus, Bitcoin and the idea of cryptocurrency, was born.

Since then, numerous coins have come and gone, looking to augment and improve upon that idea. Those who championed Bitcoin took the idea and saw it as a way to transact without needing to deal with a broken financial system that was still reeling from the 2008 global economic meltdown. To be able to transact value across the world independent of authorities was a cause to celebrate. With this achievement, however, there came a couple problems.

First, since these transactions didn’t depend on governmental authorities, they didn't guarantee stable value. A single Bitcoin was valued collectively and democratically (that is, until the whales came in). While, at first, this was a problem since there were very few people transacting in Bitcoin, as it grew in popularity, its value also rose. However, this rise in value didn’t create stability, but a wild west of sorts where price speculation and even manipulation now determines its value against fiat currencies.

The second problem was technological. It’s great that, theoretically, anyone can have access to Bitcoin. However, practically, this meant you needed a to build out infrastructure and tech, and then market this new technology, so that more and more people can use it. Given the slow adoption of any cryptocurrency globally thus far, this decade-long experiment hasn’t yet been able to show its true value in the world at large.

Facebook’s Libra seems to be trying to address both problems. The second problem is solved by default simply due to the incomprehensibly vast user-base Facebook already has, now greater than any single nation. Given the incredibly fast rise of both Instagram and WhatsApp in the number of total users, it’s an easy bet that, should the Libra take off, it would reach a larger number of people far quicker than any other crypto could ever hope to presently.

The first problem, as mentioned before, the Libra means to address by having the large number of fiat currencies as collateral, backing the direct trade-in value of the coin. But does it actually solve anything?

Is Libra’s Asset Backing Any Good?

The reserve of assets backing Libra, conceptually, seems to give the asset more stability, though personally, I’m not as sure. Coins like USDC and USDT are more stable because they’re only backed by a single currency. Having multiple assets backing a single coin may produce more harm than good. For example, the Euro currently exchanges with the US dollar 1.1:1. This means that every 1 Euro gets me $1.10 in USD. However, this rate is not always stable. In fact, just a few years ago in 2014, the Euro traded with the US Dollar at around 1.33:1. These kinds of devaluations happen all the time.

How would Libra account for the changes in exchange rates? Would it source these rates from exchanges around the world? Will it do its own internal rating? Either way, it could have a great, and possibly negative, effect on how fiat is valued, as people hedge currencies against the Libra coin and take advantage of increasingly quick changes in exchange rates.

For example, let’s say that, one can initially purchase 1x Libra for 1x USD, and purchase 1x Libra for 0.9x Euro. This reflects the standard market today. However, if someone decides to sell his or her Libra for 0.8x Euro on a global exchange (perhaps in a short bet against the Euro), they can do so as well. The buyer of that Libra can then go onto an exchange with Libra and purchase 0.9x Euro, thus making a slight profit.

If Libra sources its rates from the global exchange, then, depending on how much Euro was sold, it will eventually make it onto the crypto market. Thus, the buyer would now be able to make a further profit by purchasing 1.1x Libra for that 0.9x Euro.

When traders see that the Euro has now gone down in value against the Libra, more people will short it, and thus more devaluation of the Euro could happen. If Libra has its own internal rates, then third-party organizations would probably create their own analysis of Libra rates versus other market rates, and so the quickening devaluation would happen anyways. These kinds of things happen all the time in the foreign exchange markets, but I believe Libra would actually quicken the rate of change for all fiat currencies, due to it being a blockchain-based digital coin.

It’s easy to see how a scenario like this could quickly and heavily depreciate currencies around the world. The predictable 'side effect' would be the destabilization of local economies around the world. And as local economies capitulate, those governments would devolve into chaos. This, presumably, is why many nations and governments have expressed concern over Facebook’s project, in addition to the data and privacy scandals the company has become embroiled in recently.

Is There Another Solution?

Of course, Facebook isn’t the only company that is working on blockchain and cryptocurrency projects, just the most popular (in the public’s eye). The other elephant in the room, for the most part, is Ripple and XRP. Since 2012, when it was founded, Ripple has been working “to enable financial institutions to send money across borders”. In this endeavor, they took the cryptocurrency XRP, which was given to the company at its inception, and began to build software with and around it for banks, exchange markets, and financial institutions around the world to use.

Let’s talk XRP for a bit. Built as a Bitcoin 2.0, XRP is decentralized and open source, so its value is democratically dependent. It runs on the XRP Ledger, which can be used to trade and exchange other currencies. In other words, you can use the XRP ledger to send Bitcoin, Ethereum, and any other cryptocurrency, including (I would imagine) the Libra. The exchange is also extremely fast, settling in around 4 seconds. In fact, there was a report that the XRP Ledger is the fastest way to transfer Bitcoin. It has the potential to run more than 50,000 transactions per second.

Furthermore, Ripple has already started working with hundreds of banks and financial institutions around the world. These institutions are beginning to realize the blockchain revolution happening, and are adapting Ripple’s technology in order to compete. In other words, XRP is already on the way to becoming mainstream in the financial world. With Libra, there can really be only one “winner”, even though it was meant to be a stabilizer. However, with XRP and the XRP Ledger, many can rise, which is the heart of decentralization.

There’s a famous story about a fisherman and a businessman, wherein the businessman asks the fisherman what he does every day. The fisherman tells him that he catches fish, goes home, eats, and enjoys his life with his family. The businessman tells him that, instead, he should start a business with what he does. In a back and forth dialogue, the businessman reveals the ins and outs of starting a business, gaining customers, market share, and selling his business after investing long years and hard work into it. After this, the fisherman would finally have the time and money to retire, catch fish, go home, eat and enjoy life with his family. The moral meant by the story is that chasing money is a distraction from the more important and valuable things in life.

As nice as it sounds, I’ve found that the problem in this story is the belief that earning a substantial income is in direct conflict with living a full, virtuous life. As I’ve found, doing both is not only quite possible, but also achievable for almost everyone, especially in this day and age. Earning a good income doesn’t have to come at the expense of doing what I enjoy in life. With a little financial education, anyone can do both. And for me, it starts by becoming my own banker.

In this series, we’ve now walked through the entire process of becoming our own personal banker. In summary, we primarily store our value through the purchase of assets such as gold, real estate, participating whole life insurance, or even cryptocurrency. The reason we use these kinds of assets is because they have historically outpaced inflation and can also be collateralized. We use the money we gain from collateralization to put into a P2P lending service, invest it in the market, or purchase more assets like real estate.

When we do this, we need to make sure the income flow from these investments outpaces the interest rate and the principle we need to return for our collateralized assets. This way, we not only pay back our own assets’ worth, but also earn an income. After the asset is repaid, we can then collateralize it again to do the same thing. Thus, we have a system that earns us perpetually increasing income.

In this post, I’m going to give two example scenarios of what this can look like. These scenarios are completely hypothetical, and meant to be a bit more fun, but hopefully will give some inspiration or idea of how to practically apply all that we’ve been talking about throughout this series.

Example 1: Using Real Estate

For our first example, I’m going to use real estate, and see how it can augment my lifestyle as a music teacher. As a musician, one of my passions is to take what I’ve learned and share it with others through teaching. While online learning is becoming more and more popular, it still can’t replace the immediacy of in-person one-on-one lessons for a serious student. And so, as a music teacher, I am often contracted to go teach students privately in their own homes.

However, to save on gas, I’d rather the students drive to a studio I own to get lessons. The studio, in this case, represents the “lending” or “investing” that I would be doing for our banking function (albeit lending to myself). In order to get a commercial space, I need to factor in the costs of rent, utilities, and other things to do with maintaining a building. Furthermore, I realize that once I have a space, I can also rent out that space to other music teachers and perhaps anyone else that would want to use it when I’m not.

Using a home that I own, I refinance it to get some extra cash in order to jumpstart my business. Now, I owe principle and interest on my home, but I can finance that with the income I’m initially getting from my private lessons. During the downtime that I used to have driving to different students’ houses, I can now use that to market my studio online, and look for and hire music teachers in my local area. These teachers are privately contracted, and thus bring in additional income for me, which augments my ability to pay off my refinance as well as the monthly payments for the studio space.

As my income grows from my private lessons, I can actually now reduce my teaching time to only teach the students I want to during the times I want to. Other students can be more or less handed off to other teachers I’ve hired. When I pay off my refinance, I can now refinance again (if I wish) in order to either make the business better or start another studio somewhere else. Or I can just take the extra income and relax.

And so, as we can see, in this scenario, not only have we maintained our lifestyle with our asset, but we have actually produced a better life that we can enjoy by becoming our own bank.

Example 2: Using Participating Whole Life Insurance

Let’s go even simpler than my previous example. In fact, we can look at the hypothetical example of the fisherman and see how a Participating Whole Life Insurance policy can augment his current lifestyle.

Instead of saving his income in a measly savings account, our fisherman friend decides to move his savings into a PWLI, and put any future monthly savings into that policy as well. In addition to his growing cash value in the policy through premiums, he has interest and dividends on the account. After a few years, he decides to collateralize the current cash value of the policy, and place the loaned money into a P2P lending account, which he is using to get a decent return. With a little bit of careful management, he can make sure that the defaults on his loans are minuscule in comparison to those that pay back, which means he can take the profits to pay his policy back and earn a little extra income on the side.

Why not just save cash and put it in the lending service directly? In a PWLI policy, collateralizing means that we retain the compounding interest on the cash value of the policy. This means that, while we may be loaning the money at 6%, our policy is still gaining value at 4-5% (it’s not difficult to find a policy that grows at this rate). And so, the net interest we owe is really around 2%. Now, when we lend out our money in a P2P service, we make sure that the money we’re lending is at least more than 4% (very easy to do), and we have overall managed to make a profit! Furthermore, PWLI’s are offered by mutual companies that usually pay out a dividend based on the company’s profits, which can further mitigate what you owe on the policy, depending on what you want to do with it.

And so, it is easy to see that, even without starting a business or looking at complicated earnings reports to determine our stock market investing, we can multiply the money we have through careful management of a PWLI policy and P2P lending. All this without much negative change in the lifestyle of our fisherman friend.

And these are just two of dozens of scenarios that I could come up with for using our assets like a banker.

At the beginning of this series, I talked about the two primary functions of a traditional bank: storage and lending. So far, we’ve mostly talked about how we want to store and cement the value we earn through assets which increase in value above inflation over the long term. By collateralizing our assets, we can make use of them multiple times, allowing us to basically function like a traditional bank, except without the morally and legally questionable things they are currently allowed to do.

And so, we’ve come to the topic of lending. Lending is perhaps the most important, and yet also riskiest, part of the banking cycle. It’s exactly as it sounds: taking the money that we have through collateralization, letting another party borrow it, which they return back to us at interest. This interest rate needs to exceed the rate at which we are borrowing from our own assets, so as to increase the money that we have.

But to whom do we lend? Banks and financial institutions, being the major holders of our societies’ money, are at an advantage since they are far better known for their lending services. Almost all major borrowing events, from cars and real estate to big business loans, primarily go through banks. This locks out individuals from being able to determine where their money is going and how it is being used, putting that responsibility instead in the hands of bankers and financial institutions who don’t care much about whether we keep or lose the money we've stored with them.

A Tentative Solution: P2P Lending

However, over the past few decades, peer-to-peer (P2P) lending has become increasingly popular. Rather than relying on banks to tell us what our credit is, many people and many businesses are beginning to go through third-party services which have their own ratings for credit to obtain loans for their needs. More importantly, the average person can be an investor in these services by lending these people or businesses money and allow it to go to work for them.

There are a plethora of these services. Just a random search on Google will yield companies like Lending Club, Prosper, Sofi, and Upstart, all of which have varying reviews. What’s great about this is that we don’t have to pick just one service for our lending functions. Instead, we can spread out the money we’ve obtained from our assets to see which services are better for our own purposes.

Each of these services offer basically the same things, with some nominal differences in the way they deal with borrowers. Some are more difficult to sign up for as borrowers, others have differing rates offered to different people. Most importantly, these services give us investors choices of who we want to lend to. Furthermore, we can divvy up our money invested to different pools, so our money isn’t contingent on a single party paying us back. For example, if I put $1000 into a P2P service, I can divide that into sets of $25 dollars and loan that out to 40 different people. Theoretically, and especially when I use multiple services, I’ve divested my risk this way.

The Great Caveat

This all sounds too easy and too good to be true. And it almost is. Because there is one massive caveat to almost all P2P lending––you are not guaranteed any of the interest returns on loans. At any point in time, any of those borrowers can just default on the loan they received and decide not to pay any of their lenders back. Because these companies are not backed by a government or central authority, they have very little power or ability to force another person to pay back their loan. And since many of these borrowers already have very low credit from traditional banks and financial institutions, it can be quite likely that they may not have the means to pay back what they borrowed. In fact, this is becoming an increasingly common scenario.

There are a few ways to get around this caveat. First, rather than chasing the advertised higher rates of interest, it’s usually better to go for lower yields that would probably be more secure. Many who use P2P lending services are already lowly rated by banks, and so even a AAA rated customer is probably around a B rated client normally. Second, rather than allowing the automation of these services determine who you’re lending to, it’s much better to determine the clients for yourself. It may seem slower, but in terms of security, personally vetting client usually is less risky. Third, as given before, it’s better to diversify your investments as much as possible, so even if a few people default, it won’t necessarily bankrupt your entire portfolio.

Of course, this doesn’t rid us of all risk that we’ve taken on. After all, if we have somehow poorly chosen all our borrowers, and a majority of people we loan to decide to default on their loans, there is basically nothing we can do about it. In being our own bank, we need to assess whether this kind of risk would be worth it for us in the long run.

It was only a few months ago that I learned about the tragedy of wealthy sports stars. In the United States, many top professional athletes, whether in the NFL, NBA, or even golf, are paid millions of dollars to entertain us every week. However, when they retire, many of these sports stars think they could continue their luxurious spending lifestyles, despite not having the same level of income as when they were professional athletes. Because of this, even though they were millionaires, many eventually filed for bankruptcy because of a lack of good money management skills.

This week, I was going to go into dealing with debt as part of being our own bank, but I realized that before talking about how to manage debt, it would be a good idea to explain how to manage money, along with a few skills I’ve picked up over the years. These skills have allowed me to be in a financial position where I can actually understand and manage debt well.

Ironically, had I thought of this earlier, this could have worked well as an earlier post in this series. After all, being our own bank often starts with developing and refining good money management skills. I’ve found that, just like almost everything in life, whether you start out with a lot of money or very little of it, it isn’t the amount that you have that counts, but how you well steward and manage it that ultimately decides whether you keep it.

Assets and Liabilities, Income and Expenses

These terms are pretty popular now among people who want to learn about finances. For me, I first heard about them while listening to Robert Kiyosaki talk about his now-famous (though fictional) Rich Dad, Poor Dad story. However you may feel about the guy, the idea of assets, liabilities, income, and expenses are still an important part of understanding how to manage money well. While these terms are popular, I’ll give a brief summary of them here anyways.

Basically, income is the flow of money into our possession. Expenses take away that money. Assets are items which increase our income, and liabilities are items that obligate us with more expenses. Here’s a simple way to think about it: Let’s say I own the house I live in. That house has expenses, such as utilities, taxes, and mortgages. Since I live in it by myself, the house is a liability to me, because it’s obligating me to pay for the expenses mentioned. However, if I rent out the house, I now have income. If the rental income beats out those expenses, the house is now an asset. If it doesn’t, it's still a liability.

Viewed in this way, money management is really just managing the flow of income and expenses. Income (i.e. from a job) needs to be higher than the things I need to spend money on (i.e. food, shelter, etc.). Liabilities are a near necessity in life, simply because of the laws of thermodynamics. However, I can overcome this by making sure that, as I grow in wealth, I have more assets than liabilities. By doing so, I make sure that my money grows faster than the debts I’m taking on.

Budgeting

To manage those things, it’s typically a good idea to budget your expenses. There are many ways you can go about budgeting. For example, I used to follow the 70-20-10 rule. This means that, with the sum of my income per month, I would set aside 70% of it for regular living expenses (i.e. renting an apartment, groceries, other bills, etc.), 20% for my own pleasure, and 10% for my savings. It’s an excellent way to start if you have never done money management before. However, the goal of this rule isn't to stagnate at those percentages, but rather to decrease the ‘expenses’ portion as much as possible, so that you can gain in the other categories (pleasures and savings).

To get started, it’s a good idea to set aside time bimonthly or even weekly to go over your spendings. At the outset, it’s good to put whatever overall costs you can predict into a spreadsheet-style format. Take a look at monthly or yearly expenses and write them down. This includes the more predictable things, like rent cost, utilities costs, gas costs, and others. Then calculate the average and total monthly expenses as well as the total annual sum. This will provide a good grounding point to understand what you’re spending money on.

Afterwards, it’s a good idea to see what expenses you have that can be reduced or even removed. For example, if your phone bill is quite high, and you don’t use your phone very often for calling, then it may be better to get a cheaper prepaid plan. If your groceries expenses can be reduced by going to a cheaper store to buy the same goods, then it may be prudent to do so. Reduce, experiment, and improve on what you have. There’s no need to get locked into one method just because it may have worked for you or someone else. It’s also a good idea to get a friend to help keep you accountable to what you’re doing with your expenses.

I’ve found that the main challenge with budgeting is in unpredictable life circumstances. However, barring urgent family or health emergencies, most of these challenges can be reigned in simply with a bit of self control. There usually isn’t a need to do something big, like a vacation to some far away country, if you don’t need to. Certainly, if you’ve saved for it, you can. But, as we have discussed in our series so far, if you save a bit further and invest in assets which increase your income, you won’t need to worry about those life events emptying your stash when you least expect it.

Savings

I realized that I may have given off the impression that I deeply dislike the idea of having a savings account from my previous posts in this series. But nothing could be further from the truth. I think saving money and having a savings account is an essential part of money management, especially when we’re first starting out in this journey to be our own bank.

It is important, however, to make a mental shift from thinking we need a ‘savings account’ at a bank to needing ‘savings’. Having a savings account with a traditional bank or financial institution, with their meager interest rates, won’t help us much, especially when we need to beat the average inflation rates. Instead, it would be much better to convert the money I’m saving into USDC and keep it in a Celsius account or similar service to earn better interest on my money.

And this is the heart of the concept of savings. Because my savings, as per its name, are meant to be used only in certain situations, it’s better for me to put the majority of it in an asset which has better guaranteed capital growth, even if it has lower liquidity. By doing so, I solidify the money I have instead of losing its value to inflation. And thus, rather than believing that savings is equivalent to a savings account, I put what I’m saving into other things that have better returns than any account a bank could ever give me.

Notice, of course, that I said “the majority” of my savings. It’s a good idea to have some of our savings be more liquid, in case of emergencies.

I was listening to this interview with Dave Rubin this past week, and the topic of how powerful tech giants have become really intrigued me. In it, the interviewee, Charlie Kirk, said this:

Who is more powerful, the IRS or Google?…Google can shut down your business…Google can manipulate entire society beliefs…they know everything about me. The IRS doesn’t know crap.

As the interview continues, the topic of conversation steered towards how tech companies could take down entire livelihoods built on their platforms and how regulation could look like for the space. And while it’s definitely an interesting conversation that I would recommend for anyone to listen to, what’s more interesting to me is thinking how this relates to today’s buzz in the crypto world about decentralization and decentralized apps, and how this kind of tech could be used to change the face of the digital and internet landscape for the better.

The Philosophy of Decentralization

The idea of decentralization, at its core, is nothing new. In fact, it’s one of the hallmarks of western civilization, though we call it by a different name: democracy. The idea is that, instead of relying on a single or central authority to create the laws and regulations for everyone else, we democratize this authority so that everyone can participate and have a voice in creating those laws and regulations. The various forms of democracy have been experimented upon and improved over the centuries, from complete democracies in Ancient Athens to democratic republics such as the United States today. Despite their imperfections, democratic nations in their various forms are historically proven to create societies which progressively offer more and more individual freedoms and rights.

This democratization of authority has a kin in the economic and financial realm as well, in the form of capitalism. Through private ownership and means of production, individuals can make their own way in life and build their personal finances the way they see fit for themselves. It relies on individuals desiring to make their mark on the world through innovation, good management skills, and marketing, but the key point in this kind of economy is that each individual has the right to make their own decisions about their businesses and what they possess.

There is a massive caveat to this, of course. Because central banks and financial institutions control the supply of currency inside a system, the value and utility of money is still centralized.

I believe the current move into cryptocurrency is the last peg to be knocked down so that a global market can function freely. Once the metaphoric cat is out of the bag, in terms of decentralization, historically it’s been difficult for any nation to go back to an authoritarian system. Even now, when Bitcoin and other crypto’s are sometimes banned in certain countries, such bans are basically impossible to enforce. Furthermore, because these technologies have been built to be decentralized in their origin, even when a government creates their own cryptocurrency, people can still use the decentralized coins with their preferred exchange of choice.

Decentralization and Technology

Along with currencies, there is also potential to decentralizing applications, software, and other things in the digital and internet domain.

In the recent years, I think we’ve all come to understand the importance of getting away from giant tech companies being the sole proprietors of our digital and often real life information. Companies the likes of Google and Facebook serve billions of people around the world, and additionally are holders of vast networks of information regarding those billions of people. We know now that these kinds of companies often blacklist websites or outright ban users for their differing political views.

This may not have been a problem had these companies created platforms that were relatively small. But the reality is that they are responsible for a large portion of the livelihood of millions of people. And by retaining control over who is able to exist on their platform as well as who gets to receive support for IP they’ve created, these companies have become the business and technological equivalent of tyrants and authoritarian governments.

Decentralized apps and services has a good chance of circumventing this can of worms. Giving the authority of permitted exchange to the masses can potentially and ultimately allow everyone to be able to make their own lives better in their own way without needing to worry about whether their views align with the arbiters of a platform.

While more diverse and various platforms still need to be created for this to happen, with the digital domain (along with more and more of the real world) becoming more open to privatization, the process towards true global financial freedom is almost inevitable. It seems only to be a matter of time before everyone will be touched by this technology.

It’s a bit strange that this one ended up on this week. The crypto markets have recently been on a pretty heavy downturn, with so many people taking their money out as all of the top coins came crashing down. For the week, the top three coins have lost an average 12-13 percent of their value, while many others have lost more.

Nevertheless, this may be the perfect chance to talk about cryptocurrency in relation to becoming our own bank. Without the distraction of emotional highs, we can rationally assess the uses for cryptocurrency, and how it can potentially fulfill any of our banking needs as defined at the start of this series.

Cryptocurrency is a really interesting asset. It’s extraordinarily new, having only been invented in the last decade. Because it’s so new, it suffers both extreme volatility and hesitant adoption globally. While 2019 has been a hallmark of far better regulation guidance from governments around the world regarding cryptocurrency, we are still in the very early stages of these assets coming into their own.

Again, because cryptocurrency is so new, most of the things I will be writing about in this post are going to be pretty speculative. Also, everything I say will be in reference to banking functions, rather than any specifics on the technology. So please proceed with caution.

The Value of Cryptocurrency

This is probably the big elephant in the room. Unlike fiat, cryptocurrencies do not have governments backing their value. This can be both a positive and negative thing. It’s positive, because being government backed doesn’t guarantee value (i.e. see Iran or Venezuela). But it’s also negative because there are no legal avenues to pursue to recover any lost or stolen crypto assets.

The inherent value of cryptocurrency is in its decentralization and ability to facilitate trustless transactions. Trustless transactions is an easy thing to get behind. It basically means that, in order for me to exchange something with another person, I no longer need to worry about whether that person is trustworthy. I can transact with anyone without the need for oversight from a third party. This is huge, and has never been achieved in the history of mankind until now.

Decentralization is a little bit trickier. It means that, instead of relying on a single third party to verify and authorize transactions, we rely instead on multiple parties to provide consensus on transactions. The idea behind this is to make the system fairer and more secure, because in order to alter or corrupt the data you would have to change every record of transaction from those multiple parties at the same time.

I won’t go into any further detail about this, since that’s not the goal of this post. But in practical terms, it removes the need to have a central authority, and thus the fees required to maintain a single party system—fees which often grow higher over time because that single party can do whatever they want. And so the decentralization and the ability to transact trustlessly work in tandem to provide great inherent value to cryptocurrency. Rather than requiring me to go through intermediaries which demand high fees and determine who I can transact with, I can now instead use this coinage to do whatever I want, when I want.

What Kind of Asset Is It?

However, unlike its namesake, most cryptocurrency coins are not primarily used as currency or any kind of medium of exchange. While initially conceived as digital coinage that could be used for transferring value without needing a bank, most crypto coins are currently assessed by a speculated future sale value. In other words, the primary reason why people purchase cryptocurrency right now is to be able to sell it for a much higher price in the future. However, this speculated higher price is not a guarantee, and unlike stocks, the vast majority of current cryptocurrency coins will probably be completely worthless in the future.

This is because cryptocurrency is more like an evolution of the digital and internet world than like securities or stocks. The way these assets function doesn’t require there to be thousands of different little coins. Rather, for the most part, the cryptocurrencies that succeed seem all to act as bridges between different real world assets and the digital realm.

For example, when Bitcoin, the original cryptocurrency, was first conceived, it was used to transfer value around the world far more efficiently than even present day international bank transfers. Since its efficiency outmatched that of banks, its utility as a unit of transfer became valuable and desirable. Thus, it became an asset, as it is a better bridge to any fiat value than any financial institution could (presently) hope to be.

With this perspective of being a bridge asset, we can see how cryptocurrency has the potential to solve almost every problem with any other assets today. For example, in order to purchase or refinance real estate, you usually need to go through a long loan process with banks, lawyers, and other expensive intermediaries. With cryptocurrency, specifically the smart contract function some of them have, you no longer need those intermediaries to process both purchases and loans. Furthermore, cryptocurrencies are infinitely more divisible than gold or other precious metals, which allows any kind of investor to start buying in with any starting capital. And unlike Whole Life Insurance, crypto has even faster liquidity, which allows it to be used instantly, as long as the merchant allows it.

Any Problems?

Despite all this potential, cryptocurrency still faces quite a few hurdles going forward.

First, currently, the value of all cryptocurrencies are tied to the value of Bitcoin. This can be seen in any trend graphs or charts on crypto markets since the beginning. Whenever the value of Bitcoin goes up, many (though not all) other coins also go up. However, when the value of Bitcoin goes down, almost every single coin also decreases heavily in value. This liability is ironically centralizing, since those who hold vast amounts of bitcoin actually control the entire crypto market as well.

Secondly, there is still no mass adoption. Crypto enthusiasts are still niche compared to the number of people invested into gold and precious metals, real estate, life insurance, and any other asset class. This is mostly due to the fact that it’s still quite new. However, government regulation regarding cryptocurrency in most of the world is still vague, with some even attempting to ban it. Like the Internet, such bans are near impossible to actually enforce, so adoption seems to be inevitable. However, this lack of mass adoption and absent regulation still keeps the industry back, and may actually be contributing to the first problem mentioned above.

The last problem is far more serious: most people don’t want to hold onto any cryptocurrency in the long term, even Bitcoin (for the most part). Instead, many people coming into the market, having heard of others getting rich off of Bitcoin, instead prefer to make a profit off of crypto by buying low and selling high. When such an attitude is mainstream, especially in such a niche market, it cannot yet be truly considered an asset for us, since our idea of an asset is that it is far better to hold than sell.

Current Applications

That doesn’t mean that we can’t use cryptocurrencies as we do other assets though. In fact, the number of products being built around crypto, especially financial products, is growing extraordinarily fast.

It is already extremely easy to exchange many forms of fiat for any kind of crypto at online exchanges around the world. Again, since crypto is easily denominated, almost anyone can afford to trade in to buy percentages of those coins. After that, it’s easy to transfer your coins to all kinds of available hardware wallets, including ones you can make with paper!

Using your crypto as currency is also becoming easier, with plug-ins like Moon allowing you to purchase things on Amazon with the crypto you have. There are even debit cards which can be used to spend crypto like fiat currency around the world. There are also services we can use to earn interest on our crypto, simply by storing it in those services. Most of these services are earning far greater interest than the current inflation rate, let alone the paltry interest offered by most bank accounts.

As far as collateralizing what you have, many services now exist where, like gold and precious metals, you can collateralize your cryptocurrencies for a percentage of their worth. The interest rates on these loans are often far lower than that of other assets (except perhaps PWLI), and will allow you to get multiple uses out of the crypto you hold.

With these services, it’s easy to imagine the central role crypto has to being our own bank. I can trade my fiat income for different cryptos on exchanges, and then transfer a portion of them to a paper wallet for security purposes. I can keep some in a service which pays me higher interest for keeping my crypto there. With the coins that have lower interest, but high historical growth, I can collateralize for loans with low interest. With coins that have both low interest and low historical growth, I can use for my spending and purchasing habits. And in doing so, by simply using this single asset class, I’ve become my own bank.

To be honest, I was a bit hesitant to write about this one. After all, life insurance gets a pretty bad rap almost everywhere. And with so many different types and so many different ways they are sold, it’s no wonder. We’re all weary of insurance agents trying to take our money, selling a product that wouldn’t be accessible until something tragic happens to the policy holder. In this way, life insurance seems to better labeled as death insurance, and who wants to put money into that?

However, if we look past all of that and really dig into what life insurance can be for us rather than what it’s often sold as, we get a picture of a valuable, long-term asset. And when talking about being your own bank, and using or managing assets that have a long term growth potential, life insurance, when set up properly, has that exact potential and more.

What Kind of Life Insurance?

It’s important to delineate right now between the kind of life insurance I’m writing about here, and the ones that are often sold to us in television or online ads. In fact, this kind of life insurance is not even really offered by most insurance companies.

Rather, what I’m mainly writing about here is using a Participating Whole Life Insurance policy (from here on out, I’ll be referring to it as PWLI, just to make it easier). I will make a small mention of term insurance later, but that will be in reference to PWLI as well.

This kind of life insurance is very rarely sold due to two things. First, for the most part, the premiums being paid to this kind of policy are a bit higher than that of ordinary Term or even Index Universal Life insurance, and so sometimes require a higher and more consistent income to get started. The second reason is that most insurance agents don’t even know about structuring this kind of insurance, and those that do get a much smaller cut in their commission when selling this. So not only do they not often sell it, but those that do are often incentivized not to.

Since it’s so little known, I’m going to be diving a little more into the details of the important parts of the policy to explain how the policy being built is maximized for our personal banking functions.

Finding the Right Company

I don’t want to give the impression that it’s hard to find companies that can structure and write a proper policy. However, it’s important to understand that only mutual companies offer this kind of insurance. The importance of using mutual companies is that the policies are completely owned by the policy holder, and the companies themselves are also answerable to their policy holders, rather than some board of directors or stock holders.

This means that the profits generated by the company are given to the policy holders, in the form of dividends. However, since the dividends are treated like refunds on their premium, they aren’t taxed as income for the most part. These dividends can then be used for different things, depending on what the policy holder wants.

Cash Value

It’s important to recognize that a portion of the premium being paid into PWLI is going into what is called the “cash value” of the policy. This cash value is what makes the policies tick. Instead of the money being inaccessible, the premiums paid are building up what we can collateralize for as long as the policy exists. If the policy is terminated, the cash value is returned to the holder. If the termination is due to the policy holder’s passing, the cash value and the death benefit are given to the policy holder’s beneficiaries named in the contract.

The policy is also set up so that the cash value within it has a guaranteed growth rate, like compounding interest. If done correctly, the growth rate exceeds the rate of inflation, thus giving us an asset that beats the average rate of inflation. When we collateralize or borrow against the policy, we owe interest to the insurance company (as all loans would). If we want to, we can slightly overpay the interest so that parts of that loan repayment go into the policy’s cash value.

Because we won’t be taking any money out of the policy, the growing cash value compounds upon itself without decreasing. When we overpay the interest, we are able to add into the cash value outside of our premium, which enhances this compounding.

Note that this kind of policy guarantees a rate of return. Insurance agents often prefer selling different types of Universal Life insurance. However, those policies ride the highs and lows of the market, and so they can’t guarantee returns. In PWLI policies, the risks are instead taken on by the companies, while the payouts to the beneficiaries are guaranteed. This makes the policy far better in the long term, since there is almost no volatility involved.

Juicy Dividends

The only real volatile part of the policy is in the dividends that are paid to policy holders. These dividends, as noted before, are the result of profits from the company. And so, since profits can’t be guaranteed, neither are the dividends. However, this lack of profits never eats into the guaranteed growth of the policy’s cash value. Because of this, dividends become more like bonuses that policy holders can use toward different things.

What different things? Well, you can certainly cash them out and use it in your daily life. This is an option that makes the insurance policy like investing into a company and then receiving tax-free income from it. Dividends can also be used to help pay the regular premium owed to the policy, should the policy owner need to do so, and even used to purchase additional coverage in some situations.

However, the most important thing is that you can also use the dividends to add into the cash value of the policy. By doing so, you are adding to the compounding effect of the interest on the cash value. For most policies, the dividends start quite small. However, over time, as the cash value of the policy increases, the dividends do as well. Over the long term, when the policy is used correctly, we have an asset that basically exponentially increases in value.