Automated Banking, With Bitcoin: PART ONE
PART ONE - BITCOINS THREE COMPONENTS, AND AUTOMATED FINANCIALS
The following is an ongoing series we are calling Automated Banking, With Bitcoin.
The aim of this series is to offer a clear and full picture of Bitcoin for all ages and levels of adoption from nocoiner, to precoiner, to remnant pleb, in the context of fiat, and with an eye towards the inevitable outcome currently in progress. We hope you take the time to share and discuss this series as it unfolds with family and friends.
Enjoy.
BITCOINS FUTURE MONETARY VALUE
Bitcoin is comprised of three unique components including:
(1) a nonphysical, 21 million fixed supply set of self-custodial monetary units,
(2) a permissionless and uncensorable transaction mechanism, fueled by proof of work physical energy, financed by the 21 million fixed supply monetary units, and
(3) a publicly auditable, immutable ledger of every transaction.
Generally, these three components together are referred to as Bitcoin.
The units of Bitcoin are often referred to as bitcoin (or bitcoins) with a lower case “b” which can easily be confused and conflated with Bitcoin, capital B. And to make matters further confusing, each bitcoin is divisible into smaller units known as bits or sats, depending upon who you ask.
The transaction mechanism component of Bitcoin is generally referred to as “mining” and those conducting this mechanism are known as miners. In part because the main focus of this mechanism in the beginning of this new monetary systems launch is the issuance of bitcoin, through a random, but scheduled cadence, all of which is a rather trivial matter when considering longer time frames and therefore perhaps at some point in the future miners will be referred to instead as something like “batchers” because that is their primary function, to batch bitcoin transactions in a trustless manner.
Lastly, the immutable public ledger component is generally referred to as a “node” and those operating them as “node runners” or “sovereign individuals” because they, like nation-states, consider themselves to be their own supreme authority on monetary policy. Also rather confusing is that nodes are referred to as Bitcoin, or Bitcoin nodes, because nodes house the Bitcoin computer protocol, the computer code that regulates each of the three components; the set of bitcoin, the bitcoin transaction mechanism, and the ledgers’ list of bitcoin transactions.
Alone, each of these components are interesting from an academic perspective but not very useful. However, when placed together, the three components form an unbreakable and thermodynamically sound superior monetary system. Perhaps the first fully functional monetary system, and therefore, the last monetary system humanity will ever need.
This new monetary system is so many orders of magnitude superior to our current monetary systems, that by its 12th year of existence, in 2021, the market capitalization of Bitcoin had reached one trillion dollars. No other money, asset, or business, in the history of humanity has ever attained such a quick assent to a one trillion dollar market cap.
Bitcoin is in the process of completely obsoleting all inferior forms of money and the entities that support those inferior monies, including banks, institutional and corporate rent seekers, and the accounting firms and government agencies that attempt to enforce the integrity of those inferior monies.
During Bitcoins initial 130 year start-up phase, with the last issuance of new bitcoin occurring around the year 2140, Bitcoin monetary units will soak up all monetary premiums from all inferior forms of money, to include precious metals like gold and silver, rare minerals like diamonds, rubies and pearls, all government fiat currencies, all premiums held in bonds, notes, bills, debts, equities, real estate, art, and collectibles, globally, with a current total addressable market capitalization approaching one quadrillion dollars as of this year, 2023, as printer goes brrr once again.
With each of the 21 million bitcoins currently divisible into 100,000,000 smaller units known as bits, or sats, and Satoshi’s one million bitcoin likely burned as a sacrificial gift to humanity, the total units in the system is 2 quadrillion, (multiplying 20 million bitcoin by 100,000,000 sats). We can therefore assume a future value of each sat at 50 cents (dividing 1 quadrillion dollars by 2 quadrillion sats). This translates into a future value of 50,000,000 dollars per bitcoin, priced in today’s dollar purchasing power.
You might want to get some, in case it catches on ;-)
DEFINING MODERN BANKING
Bitcoin automates banking. It is the final word in banking and money for thousands of years into the deep and distant future. It’s a big deal.
To understand Bitcoin - and what it is causing to happen to banking and all of the organizations associated with banking - you need to first understand banking.
The business of banking serves three primary functions to include, storing, lending (which can be viewed as money creation in and of itself), and facilitating the transfer of money in a trusted manner. In order to provide these three services and operate as a bank, all banks operate under privileged government license which requires an adherence to the generally accepted accounting principles within the jurisdictions they serve.
Surprisingly, the key insight into banking is the processes conducted to adhere to those generally accepted accounting principles. An interesting rabbit hole is uncovered as we pull on this thread.
Governments enforce the adherence to these accounting principles by requiring banks to undergo periodic accounting audits by third party “independent” accountants. Should an independent accountant identify a failure of compliance with the agreed upon accounting principles during an audit, the government may strip the bank of its license and of its privilege to conduct banking within that jurisdiction. Should the bank continue to operate anyway, without the license, the government will send men with guns to stop the bank from operating.
In practice, this essentially never happens. Independent accountants rarely identify failures in application of the accepted accounting principles, or if they do, the banks make the correction, and the auditor signs off on the audit with a clean bill of health, so the bank is basically never threatened with losing its license.
But what does often happen is that the auditor will identify issues of concern with the bank about its ability to continue operating, that it’s assets are substantially undervalued relative to its obligatory liabilities, or that macro business environment conditions are such that the business may not have the resources to continue operating indefinitely.
When this happens, the auditor is required to include language in its audit opinion stating this fact. However, they RARELY do this. Because if they did include such an opinion, that would cause investors and depositors to lose confidence in the bank, and that would cause a bank run and the bank could potentially fail, and more importantly for the accountants, assuming the bank did not fail, the accountants would surely not be hired the following year to perform the audit, they would lose their business revenue providing the audit services.
In other words, accountants are not, in practice, independent. They are financially tied to their customers, the banks. And although they pretend to maintain airs of independence with policy regarding conduct to suggest as much, at the end of the day, the partner running the audit is going out to dinner and having drinks with the CEO of the company they audit. These are very friendly long recurring relationships and the modus operandi is “if you see something, wink, wink, say nothing.”
For example in the case of Silicon Valley Bank, the 2022 auditors report concluded on February 24, 2023 with the following language:
We have audited the accompanying consolidated balance sheets of SVB Financial Group and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
…
/s/ KPMG LLP
We have served as the Company's auditor since 1994
San Francisco, California
February 24, 2023
See for yourself, page 92 of SVB’s 2022 SEC Form 10-K Annual Report.
There was no indication by the auditors of the banks going concern, as there obviously should have been, because less than one month later, on March 17, 2023 the bank filed for bankruptcy. The accounting firm failed to notify the public of the companies going concern because they simply weren’t independent. They can’t be independent when they are paid by their customer, the bank, to write the opinion.
Duh.
AUTOMATED AUDITS
Banks pay these third party “independent” accountants for their audit services.
This is problematic.
The payment for the services to perform the audit creates a conflict of interest. If the bank was likely in a position to not have the resources to continue as a going concern the bank can simply offer a larger fee to the third party accountant as a form of bribe to look the other way and sign off on the audit, allowing the bank to conduct itself dangerously close to imploding without receiving a bad opinion from the auditor.
This didn’t just happened with Silicon Valley Bank. This actually happens all the time, and not just with banks, with all sorts of businesses. Not only are banks required to have periodic audits, all publicly traded companies, and pretty much any privately held company looking for large financing optionality also must have an auditors opinion accompany their financials statements.
What are supposed to be independent third party auditors end up being bribed auditors, collecting large fees for signing off on audits that in practice do not provide any public utility other than the good feeling that adults are somehow making prudent decisions about allocating their capital.
Here is Max Keiser explaining the corruption of the accounting industry to Tucker Carlson.
Once you get to a certain income plateau you don’t report, and banks advertise that service.
There’s approx. 22 trillion dollars in a floating pool of money that is managed by the four big accounting firms. The biggest accounting firms in the world manage a 22 trillion dollar pool of capital that has never been taxed and will never get taxed and that pool continues to grow.
It floats around from this jurisdiction to that jurisdiction, through loopholes. The big four accounting firms are the biggest crooks. They are the biggest financial crooks in the world, by far. If you wanted to reform this whole system, you would start there, those big four are where you would start.
So let’s start there.
Imagine if rather than having third party “independent” audits conducted by humans, we were able to create an automated auditing system, one that did not require humans. What if we could create a computer protocol that could be fed all of the transactions of the company and it could output a summary of the companies financials statements, and automatically compare them to the companies internal financial statements and identify objectively whether the company followed the accounting rules.
That would be pretty neat.
But that’s not all. What if also, all of the transactions by the company could be made public, to a public ledger of transactions, for truly independent, unpaid, third parties to verify for themselves the voracity of the financials of the company, and the ability of the company to continue as a going concern.
This would be a wonderful innovation in the field of financial auditing, however it would completely wipe out the jobs of some of the most corrupt financial criminals in the world, the big four accounting firms. An automated and public audit process, in other words a public ledger, would also stop those companies that are operating fraudulently from having the freedom to do so.
A books and records auditing innovation would wipe out some of the wealthiest corrupt individuals ability to continue their fraudulent games. These corrupt people would have a large financial incentive to discredit such an innovation as an auditable public ledger, and would spend large sums of their wealth to confuse the public about such an innovation, in order to keep their corrupt operations continuing, as a going concern.
History has thoroughly demonstrated that humans, as hard as they might try, will from time to time not perform audits well enough to identify potential issues of a going concern for a company, including banks and many other types of businesses.
Whether you look at the 2001 Enron collapse, the 2008 Lehman Brothers collapse, the 2022 Sam Bankman-Fried FTX collapse, or the 2023 collapses so far this year with Silicon Valley Bank, Signature Bank, and First Republic Bank. Every single one of these businesses had a third party “independent” auditor sign off on the accounting records and the future going concern of their operations.
But you never hear of the accounting scandals behind every single one of these epic frauds and ensuing fails, because of the tremendous financial incentive for the status quo by fraudulent corrupt individuals to continue.
Bitcoins auditable public ledger is a massive concern for a certain cohort of wealthy people around the world, and they will do anything within their means to slow the worlds understanding of the massive advances in the automation of financial audits, and as we will explore in the ensuing subsequent parts to this series a whole host of automation around finance and banking that Bitcoin enables.
It’s ok, Bitcoiners can stack sats and hodl far longer than corrupt individuals can fund their gaslighting, and that my friends, is why Bitcoin inevitably wins.
Until next time, cheers!
How many pieces is this series expected to be?