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What can we learn about ownership custody of money from the PMC bank case!

There are many types of money and many ways to store that money. Whether you really own and control that money you see on the screen when you check your bank balance is a completely different thing.

For fiat currency or for crypto, understanding the concept of custody and ownership of money is crucial to safeguard your wealth – be it Rupees, Gold, Dollars or Bitcoin.

Fiat money is considered safe but we’ve seen time and again how people lose their money as banks collapse or something goes wrong in the economy.

PMC case background

The most recent case of Punjab and Maharashtra Co-operative Bank (PMC Bank) is a good example of a scenario where a bank’s management, either through their inefficiency or fraud, loses depositors’ money in bad debts. Although there are systems to highlight such events, the rules are inconsequently broken. 

Reserve Bank of India, the Central Bank of the country, announced initially that account holders could only withdraw Rs. 1000 per account. That is less than $15 per month. There were widespread protests that resulted in the limit to be increased to Rs. 10,000. This was a move to curb the protests but is, by no means, enough. Recently, RBI increased the limit to Rs. 25,000/-.

It sounded strange to most as Fiat and banking system looks like an invincible giant from a layman’s perspective. This however, is not true. It is important to understand whether we own and control our Fiat or Crypto or not.

Ownership of Money

In the case of Fiat money, when it is deposited in a bank account, it is a contract that you make with the bank to hold your money and to use it as they see fit, which is lending or investment in most cases. Once the money is lent, it depends on the bank’s efficiency that determines a bank’s profit. Yes, you can withdraw the money in most cases. But if the bank is bad at their business or if their interests are not aligned with yours, they can also squander the money. 

Of course, there are checks and balances maintained and insurance that the RBI maintains with itself. But these are only partial reserves and in a country with a high rate of corruption, these checks and balances can fail too often. In such cases, the money is lost and depositors do not have much power. Mandatory insurance of only Rs. 100,000/- is to be maintained by banks in case of such failures. This means if PMC Bank fails, each depositor will receive a maximum amount of Rs. 100,000/- (even if their deposits are higher than that).

Custody of Money

How can RBI prevent me from withdrawing my own money? It is because PMC was my custodian. I did not really control the money as soon as it went into the bank.

For Fiat, the control is always with the bank or the central bank or the solvency of the government. The only form of Fiat that gives us any control is Cash.

Every digital form of money is just a ledger entry in some database that can be hacked, mismanaged, burnt to the ground or seized by the government or the central bank as in cases like demonetisation.

Maintaining custody and ownership of Fiat is extremely difficult because you are trusting the government (it is promised payment), your central bank (they can mint any amount of money and make your wealth’s worth less every day), and your bank to store it safely, use it wisely and be accountable for it.

Crypto

These problems do not just exist in the Fiat space. They also exist in the crypto industry. With crypto too, there is a responsibility of ownership and custody. If your crypto is stored on a centralized exchange, in a hot wallet, third party wallet app, you are trusting all of these entities, the blockchain hosting these tokens, their software and even the people working there. Check the case of missing crypto after the Canadian CEO of a crypto exchange Quadriga died.

However, crypto offers a solution where you do not have to trust anyone with the custody. You could just store it on a paper wallet or lock away the seed phrase in your mind. But it is important to take ownership and control of your crypto tokens as much as your Fiat money.

Conclusion

Even the most ardent crypto enthusiasts I’ve met have, at some point, stored their tokens on a centralized exchange, on a mobile wallet or their private keys in their email accounts. It is not possible to store your crypto on paper or a hardware wallet all the time, especially if you wish to trade. But it is important to know the risks before you opt for the next fancy service that asks you to send your crypto to ‘your’ wallet on their centralized server.