Imagine you need to pay Charlie, who banks with HSBC. (The same analysis, of course, works if you’re a Euro customer of Deutsche Bank or a Dollar customer of Citi, etc)īut what happens if you need to pay somebody at a different bank? We can represent this graphically below: the only parties involved are you, Bob and Barclays. It all balances out and it’s all done inside the bank: we can say that the transaction is “settled” on the books of your bank. They owe you £10 less and owe Bob £10 more. It’s all done electronically on Barclays’ core banking system and it’s all rather simple: no money enters or leaves the bank it’s just an update to their accounting system. Paying Bob is easy: you tell the bank what you want to do, they debit the funds from your account and credit £10 to your friend’s account. You owe £10 to a friend, Bob, who also uses Barclays. Imagine you’re Alice and you bank with, say, Barclays. Paying somebody with an account at the same bank To understand what is going on when money moves around, it’s important to realise that every account balance can be seen in these two ways. Similarly, if you are overdrawn and owe money to the bank, that becomes your liability and their asset. That’s why we say our accounts are in credit: we have extended credit to the bank. Instead, you have lent that money to the bank. There isn’t a pot of money sitting somewhere with your name on it. When you pay money into a bank, you don’t really have a deposit. Perhaps the most important thing we need to realise about bank deposits is that they are liabilities. First, let’s establish some common ground In this article, I hope to change this situation by giving a very simple, but hopefully not oversimplified, survey of the landscape. That is: if you “wire” funds to a supplier or “make a payment” to a friend, how does the money get from your account to theirs? But it also highlighted another point: in my expecience, almost nobody actually understands how payment systems work. There was much comment about how expensive or difficult this would have been in the regular banking system – and this could well be true. 194,993 BTC transaction worth $147m sparks mystery and speculation
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