Tomorrow Swiss Citizens could change how banking works forever in the Vollgeld referendum


Vollgeld (English translation is “full money”) would end fractional reserve banking. We wrote about Vollgeld in January 2016 when the idea was first mooted. Since then there has been a lot of progress. The Vollgeld promoters got enough votes to get to a referendum and raised enough money to take out some advertising to promote Vollgeld.

The TL:DR version: if Vollgeld passes, only the Central Bank will be allowed to create money. Banks will only be able to lend what they have on deposit (aka 100% reserves, meaning no systemic risk or bank runs). 

Update: citizens voted no.

What happens in Switzerland tomorrow will impact banking globally. This post assumes a reader who is outside Switzerland who may want some background on how things work here (readers within Switzerland may find it all a bit obvious, but if I have got anything wrong please tell me in comments). I happen to live in Switzerland, but the over 23,000 Daily Fintech Subscribers are from all over the world, as are the Experts who write the daily posts. 

This post covers:

  • Switzerland’s unique democracy is why Vollgeld could happen here first.
  • How Vollgeld could be a positive for Switzerland’s leadership in global wealth management and and Crypto Finance.
  • How Vollgeld has parallels in many countries and how the idea could catch on globally

Switzerland’s unique democracy is why Vollgeld could happen here first.

Can you imagine any other country where the citizens would actually take the time to understand and discuss a subject as nerdy as fractional reserve banking?

Swiss democracy is different in three key ways:

  • Direct Democracy via Referenda. The British people famously had a referendum that ended in Brexit. In Switzerland, there are multiple referenda each year, with billboards everywhere touting Yes or No votes (Ja/Nein, Oui/Non, Si/Non and Ea/Na  depending on which part of Switzerland you live in) and many citizens do take the time to study the subject before voting.
  • Decentralised Democracy via Gemeinde/Commune. Power is local. The Central/Federal Government is small compared to Cantonal or Gemeinde/Commune level. Many big decisions that really affect day to day lives are made at the most local level by direct democracy in face to face meetings. Fintech fans talk about Switzerland being Crypto Nation but at governance level – where it really matters – Switzerland is a Decentralised country, like Bitcoin/Blockchain is decentralised . 
  • Legal integration of multi-everything at Central/Federal level. Switzerland is multi-language (German, Italian, French, Romansch officially and English unofficially) and multi-religion and with 25% of residents being foreigners, multi-ethnic. Most interesting to Daily Fintech is the fact that Switzerland is officially multi-currency due to the WIR history (explained here from March 2015 when I first learned about the WIR) and so Bitcoin is officially legal tender.  At the Central/Federal level, a few laws are made that protect this extraordinary amount of diversity.

Switzerland should not work in theory, but in practice it works very  well.

How Vollgeld could be a positive for Switzerland’s leadership in global wealth management and Crypto Finance

Most bankers think that Vollgeld is a really bad idea. They stress how important Financial Services is to the Swiss economy (over 10% of GDP and 5% of workforce). One can understand why bankers hate the idea of Vollgeld. Fractional Reserve Bank has almost literally been a “license to print money”. 

So the debate is being framed as populists vs bankers. However some forward-thinking bankers and Fintech entrepreneurs may also make a case that Vollgeld could be a positive for the banking industry.

  • Even if Banks cannot create money they can be valuable intermediaries as conduits of capital (because lenders need to meet borrowers). The transition from creators of capital to conduits of capital is already happening in the lending and equity crowdfunding marketplaces. So why fight the inevitable? Get ahead of the trend aka disrupt before you get disrupted.
  • The line of business least impacted by Vollgeld will be Wealth Management, where Switzerland excels. Investors are happy to pay directly for having assets protected. This maybe called negative interest rates today. It might simply be called direct fee for service – pay to have your assets secure and protected.
  • If banks are paid to store assets, banks can also offer to lend money based on these assets as collateral. This is different from fractional reserve banking because the risk is the individual customer’s risk. There is no systemic risk.

Banks could provide really secure cold storage for cryptocurrencies – for a fee – and enable lending from that cold storage via Lombard Loans. Vollgeld could push Switzerland’s position as Crypto Nation from a niche idea to mainstream.

How Vollgeld has parallels in many countries and how the idea could catch on globally

When millions start thinking about what money is from first principles, the toothpaste is out of the tube. It is no accident that Vollgeld is happening at the same time as the rise of stateless cryptocurrencies. In those Vollgeld ads, the old Grandparent won’t know about Bitcoin but the Millenial grandchild probably owns some.

Vollgeld has parallels in many countries:

  • It has already happened in Iceland.
  • in the UK it is called Positive Money and has backing from some serious establishment figures (such as Lord Adair Turner and Martin Wolf). 
  • The UK based Positive Money is also getting attention in other English-speaking countries like USA and NZ.
  • Onsgeld in Holland

The schemes vary in detail and obviously get vociferous and well-reasoned opposition from the banking lobby, but what is interesting is that when the Vollgeld type schemes with 100% reserves are explained to mainstream consumers, the most common reaction is “that is how I thought banking worked”. It is the idea of Fractional Reserve Banking – how the world actually works today – that seems strange to many ordinary people.

What is bigger than any single cyber currency is that millions of people are starting to think about what money is from first principles. The basic thought is that money is only worth what we all agree it is worth. Once that thought gets established in the minds of millions of people, the toothpaste is out of the tube and you won’t get it back in.

If Vollgeld becomes law in Switzerland, these initiatives in other countries will gather momentum. If Swiss bankers and wealth managers figure out how to make money in this new environment, opposition to the idea in other countries will be more divided.

We know what bankers think – Vollgeld is a really bad idea. There are lots of well-written posts outlining why. In simple terms, they appeal to the natural conservatism of the Swiss people. Banking is a big % of Swiss GDP and employment so they appeal to the notion that it is unwise to kill the goose that laid the golden egg.

Tomorrow we will find out what what Swiss Citizens think. The banker’s appeal to status quo may win the day. That is what the polls indicate. The Vollgeld pitch (via ads on YouTube for example) also addresses the conservatism at an emotional level but in a different way. The ads show a millennial (distrusting banks since Global Financial Crisis) and their grand parents (the generation that has tended to like gold and cash under the mattress). That emotional appeal bypasses the generation in between and the current status quo.

If Vollgeld passes, it still needs to turn into legislation and as always “the devil is in the details” and changes can be be made that make the banking lobby happier.

Most forecasts are for a No vote. We all got Brexit wrong. Vollgeld is another low probability/high impact event.

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Bernard Lunn is the CEO of Daily Fintech and provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss our services).

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