Amid the banking chaos of the 21st century, some are looking back more than 600 years ago, to the Medici Bank — one of the most powerful banks of its time. It established its business and became one of the most respected banks in Europe during its prime, and the prominent Italian family of bankers were early adopters of fractional reserve banking, a practice that Medici Bank customers were unaware of, and that ultimately led to the financial institution’s failure.
The collapse of three major banks in mid-March 2023 has caused people to scrutinize the risks of fractional reserve banking. The practice of fractional reserve banking is essentially when a financial institution holds only a fraction of deposits in the bank, and the remaining funds are used to lend or invest in order to obtain a yield. One of the earliest known examples of fractional reserve banking was the Medici Bank, founded in Florence, Italy, in 1397 by Giovanni di Bicci de’ Medici.
In the first five years of operation, the Medici Bank grew rapidly, and before the financial institution’s demise, it established branches all over Western Europe. Similar to bankers in the early 20th century like J.P. Morgan, Jacob Schiff, Paul Warburg, and George F. Baker, members of the House of Medici were extremely powerful. The Medici Bank was known to be one of the largest business enterprises during the Renaissance but ultimately failed after close to 100 years of operation.
Philip J. Weights, the president of the Swiss Finance and Technology Association (SFTA), explained in a 2015 Linkedin post how the weight of “excessive lending” and “insufficient reserves” led to the bank’s ultimate demise. According to Raymond De Roover’s book “The Rise and Decline of the Medici Bank (1397-1494),” published in 1963, liquidity was an issue from the bank’s inception. De Roover’s book details that the Medicis’ reserves held less than 10% of deposits due to the family members’ managerial abilities.
The 380-page book explains how the Medici Bank experienced a period of decline between 1463 and 1490 due to shady and corrupt banking practices. The fraudulent schemes caused several Medici branches to be liquidated and sold off to other banks. De Roover argued that despite being a prominent member of the House of Medici and a successful banker, Francesco Sassetti “was unable to avoid the disastrous liquidation of the Bruges, London, and Milan branches.” De Roover’s book notes that significant lending was a popular practice that gathered high-interest rates.
Florins, gold coins minted by the Republic of Florence, were often held on the Medici Bank balance sheet. However, the lack of reserves was a constant source of frustration for both Medici banking partners, and government officials and customers. In a 2018 editorial on bigthink.com, author Mike Colagrossi detailed that “it was due to advancements and financial solutions like these that the Medici bank became so powerful” as the Medicis received high interest on loaned payments. Colagrossi notes that the downfall of the bank took place after the death of Cosimo Medici in 1464, who was the bank’s boss at the time.
After the fall of three major banks in 2023, Jim Bianco, president of Bianco Research, a firm that specializes in macro analysis for institutional investors, explained how fractional reserve banking “was invented by the Medicis in Florence in the late 15th century.” In his Twitter post, Bianco also mentions the “tuppence” scene in the 1960s Disney musical film “Mary Poppins” and the bank run scene from “It’s a Wonderful Life” filmed in the 1930s, stating that “all of these are still very relevant depictions of what is happening today.”
Bianco opined:
Nothing that is happening is new. Our banking system is several hundred years old and has constantly had these issues.
Triple-Entry Bookkeeping — A New System of Accounting
Bianco also mentioned that double-entry bookkeeping was the “technology” used to enable the Medici Bank’s fractional reserve banking practices. The double-entry scheme involves a ledger that records both debits and credits and is still used in the modern financial world today. At the time, the Franciscan Friar Luca Pacioli wrote a book about double-entry accounting with help from the well-known Renaissance artist Leonardo da Vinci. Although Pacioli and da Vinci did not claim to invent the new system, their research led to the wider and more structured use of double-entry bookkeeping that’s still used today.
Soon after the method was popularized, Giovanni de Medici implemented the concept into his family’s bank. It allowed the House of Medici to operate with less than 10% of deposits and extend its lending practices far and wide until liquidity completely dried up. More than 600 years later, an anonymous person or group released a paper that introduced the concept of triple-entry bookkeeping. In addition to records of both debits and credits, a third component was added, which is a cryptographic receipt verified by a third party to validate the ledger’s entries.
Satoshi Nakamoto’s invention has produced a system where a double-entry bookkeeping system doesn’t need to be trusted now that an improved ledger accounting scheme exists. A single-entry or double-entry accounting system can be forged and manipulated, but the cryptographic assurance from a triple-entry bookkeeping system is much harder to add fraudulent data to. While Bianco is correct that there is nothing new with the way bankers operate today, compared to the days of Medici, Nakamoto’s invention has given the world a new method of accounting that can transform it a great deal, just as the invention of double-entry bookkeeping has done.
What lessons can be learned from the fall of the Medici Bank? Share your thoughts in the comments section below.
Jamie Redman is the News Lead at Bitcoin.com News and a financial tech journalist living in Florida. Redman has been an active member of the cryptocurrency community since 2011. He has a passion for Bitcoin, open-source code, and decentralized applications. Since September 2015, Redman has written more than 6,000 articles for Bitcoin.com News about the disruptive protocols emerging today.
Image Credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
Central Bank of Brazil Confirms It Will Run a Pilot Test for Its CBDC This Year
The Central Bank of Brazil has confirmed that the institution will run a pilot test regarding the implementation of its proposed central bank digital currency (CBDC), the digital real. Roberto Campos Neto, president of the bank, also stated that this ... read more.
Amid the banking chaos of the 21st century, some are looking back more than 600 years ago, to the Medici Bank — one of the most powerful banks of its time. It established its business and became one of the most respected banks in Europe during its prime, and the prominent Italian family of bankers were early adopters of fractional reserve banking, a practice that Medici Bank customers were unaware of, and that ultimately led to the financial institution’s failure.
The collapse of three major banks in mid-March 2023 has caused people to scrutinize the risks of fractional reserve banking. The practice of fractional reserve banking is essentially when a financial institution holds only a fraction of deposits in the bank, and the remaining funds are used to lend or invest in order to obtain a yield. One of the earliest known examples of fractional reserve banking was the Medici Bank, founded in Florence, Italy, in 1397 by Giovanni di Bicci de’ Medici.
In the first five years of operation, the Medici Bank grew rapidly, and before the financial institution’s demise, it established branches all over Western Europe. Similar to bankers in the early 20th century like J.P. Morgan, Jacob Schiff, Paul Warburg, and George F. Baker, members of the House of Medici were extremely powerful. The Medici Bank was known to be one of the largest business enterprises during the Renaissance but ultimately failed after close to 100 years of operation.
Philip J. Weights, the president of the Swiss Finance and Technology Association (SFTA), explained in a 2015 Linkedin post how the weight of “excessive lending” and “insufficient reserves” led to the bank’s ultimate demise. According to Raymond De Roover’s book “The Rise and Decline of the Medici Bank (1397-1494),” published in 1963, liquidity was an issue from the bank’s inception. De Roover’s book details that the Medicis’ reserves held less than 10% of deposits due to the family members’ managerial abilities.
The 380-page book explains how the Medici Bank experienced a period of decline between 1463 and 1490 due to shady and corrupt banking practices. The fraudulent schemes caused several Medici branches to be liquidated and sold off to other banks. De Roover argued that despite being a prominent member of the House of Medici and a successful banker, Francesco Sassetti “was unable to avoid the disastrous liquidation of the Bruges, London, and Milan branches.” De Roover’s book notes that significant lending was a popular practice that gathered high-interest rates.
Florins, gold coins minted by the Republic of Florence, were often held on the Medici Bank balance sheet. However, the lack of reserves was a constant source of frustration for both Medici banking partners, and government officials and customers. In a 2018 editorial on bigthink.com, author Mike Colagrossi detailed that “it was due to advancements and financial solutions like these that the Medici bank became so powerful” as the Medicis received high interest on loaned payments. Colagrossi notes that the downfall of the bank took place after the death of Cosimo Medici in 1464, who was the bank’s boss at the time.
After the fall of three major banks in 2023, Jim Bianco, president of Bianco Research, a firm that specializes in macro analysis for institutional investors, explained how fractional reserve banking “was invented by the Medicis in Florence in the late 15th century.” In his Twitter post, Bianco also mentions the “tuppence” scene in the 1960s Disney musical film “Mary Poppins” and the bank run scene from “It’s a Wonderful Life” filmed in the 1930s, stating that “all of these are still very relevant depictions of what is happening today.”
Bianco opined:
Nothing that is happening is new. Our banking system is several hundred years old and has constantly had these issues.
Triple-Entry Bookkeeping — A New System of Accounting
Bianco also mentioned that double-entry bookkeeping was the “technology” used to enable the Medici Bank’s fractional reserve banking practices. The double-entry scheme involves a ledger that records both debits and credits and is still used in the modern financial world today. At the time, the Franciscan Friar Luca Pacioli wrote a book about double-entry accounting with help from the well-known Renaissance artist Leonardo da Vinci. Although Pacioli and da Vinci did not claim to invent the new system, their research led to the wider and more structured use of double-entry bookkeeping that’s still used today.
Soon after the method was popularized, Giovanni de Medici implemented the concept into his family’s bank. It allowed the House of Medici to operate with less than 10% of deposits and extend its lending practices far and wide until liquidity completely dried up. More than 600 years later, an anonymous person or group released a paper that introduced the concept of triple-entry bookkeeping. In addition to records of both debits and credits, a third component was added, which is a cryptographic receipt verified by a third party to validate the ledger’s entries.
Satoshi Nakamoto’s invention has produced a system where a double-entry bookkeeping system doesn’t need to be trusted now that an improved ledger accounting scheme exists. A single-entry or double-entry accounting system can be forged and manipulated, but the cryptographic assurance from a triple-entry bookkeeping system is much harder to add fraudulent data to. While Bianco is correct that there is nothing new with the way bankers operate today, compared to the days of Medici, Nakamoto’s invention has given the world a new method of accounting that can transform it a great deal, just as the invention of double-entry bookkeeping has done.
What lessons can be learned from the fall of the Medici Bank? Share your thoughts in the comments section below.
Jamie Redman is the News Lead at Bitcoin.com News and a financial tech journalist living in Florida. Redman has been an active member of the cryptocurrency community since 2011. He has a passion for Bitcoin, open-source code, and decentralized applications. Since September 2015, Redman has written more than 6,000 articles for Bitcoin.com News about the disruptive protocols emerging today.
Image Credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
Central Bank of Brazil Confirms It Will Run a Pilot Test for Its CBDC This Year
The Central Bank of Brazil has confirmed that the institution will run a pilot test regarding the implementation of its proposed central bank digital currency (CBDC), the digital real. Roberto Campos Neto, president of the bank, also stated that this ... read more.
Statistics recorded on April 15, 2023, show that the number of coins in circulation for the stablecoin BUSD dropped below the 7 billion range to 6.68 billion, marking the lowest number of BUSD in circulation since April 2021. Furthermore, data indicates that the supply of BUSD has shrunk by 19.8% over the past 30 days.
BUSD, which was once among the largest stablecoins, remains the third-largest USD-pegged token. However, on February 13, 2023, Paxos announced that the New York State Department of Financial Services (NYDFS) had directed the company to stop issuing BUSD. On that day, around 16.1 billion BUSD tokens were in circulation, and since then, 9.42 billion stablecoins have been redeemed.
Between March 15 and April 15, 2023, BUSD’s supply decreased by 19.8%. In mid-November 2022, BUSD’s market capitalization was at its highest point ever at $23.49 billion, with a global trade volume of over $11 billion within a 24-hour period. However, on April 15, 2023, with its much smaller market valuation, BUSD’s 24-hour global trade volume is approximately $2.61 billion.
Nansen’s statistics reveal that Binance, the largest crypto exchange by trade volume, holds 6.1 billion BUSD, according to Nansen’s exchange portfolio tool that shows the trading platform’s reserve balances. The BUSD rich list shows that the top ten holders, including Binance’s stash, hold 92.52% of the circulating supply out of 166,645 unique addresses that hold BUSD. Furthermore, the top 100 BUSD holders own approximately 96.09% of the stablecoin’s current supply.
Binance-associated addresses control seven out of the top ten largest BUSD addresses. Current data suggests that if the redemptions continue, the stablecoin issued by the Makerdao protocol DAI will soon surpass BUSD’s current number of tokens in circulation. Presently, there is $5,016,181,138 DAI in circulation, but the DAI supply has also decreased over the past 30 days by 13.6%.
What do you think about the number of BUSD removed from circulation since February 13? Share your thoughts about this subject in the comments section below.
Jamie Redman is the News Lead at Bitcoin.com News and a financial tech journalist living in Florida. Redman has been an active member of the cryptocurrency community since 2011. He has a passion for Bitcoin, open-source code, and decentralized applications. Since September 2015, Redman has written more than 6,000 articles for Bitcoin.com News about the disruptive protocols emerging today.
Image Credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
Central Bank of Brazil Confirms It Will Run a Pilot Test for Its CBDC This Year
The Central Bank of Brazil has confirmed that the institution will run a pilot test regarding the implementation of its proposed central bank digital currency (CBDC), the digital real. Roberto Campos Neto, president of the bank, also stated that this ... read more.
Source From : News