MIT’s Interesting Proposal for a More Stable Financial System
On the 16th of January 2018, three diamond firms approached Punjab National Bank requesting LOUs. (Letter of Understanding is a form of bank guarantee under which its customers can raise money from any other Indian bank’s foreign branch in the form of a short-term credit). Punjab National Bank demanded 100% cash margins (profitability) as a common requirement to issue LOUs.
But, the firms responded back stating this requirement was not enforced for the previous LOUs they received since 2010. That’s when the Punjab National Bank got suspicious. Few bank employees had been issuing fake LOUs through the SWIFT system(Messaging system between banks).
The software which PNB used didn’t make a record of such transactions. Hence PNB was not aware of such activities. Later on 12th February 2018, PNB detected a scam worth around $1.8 billion.
Our current banking systems lack accountability and transparency. The Financial Depression of 2008 could have been discovered and prevented only if our banks were more transparent. Utility Settlement Coin was proposed by an association of banks.
USC is a cryptocurrency backed by fiat currency(ex: USD) present as electronic cash balances in the participating banks. The problem is execution of Know Your Customer (KYC) and Anti-Money Laundering functions.
Hence MIT came up with Digital Trade Coin(DTC). DTC is similar to USC but instead of fiat currency, it is backed by assets to ensure stability. In DTC we have sponsors, administrator, a special bank, and users.