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A Letter from Brian Cai（Founder and CEO of FORTUNA) #004
Hello everyone! My name is Liangbin (Brian) Cai, I’m founder and CEO of FORTUNA. I’ve started a series called ‘Founder Blogs’ to share some of the ideas me and my team have, that do not fit anywhere else. Welcome!
After graduating from Yale University, I won first prize at the International Mathematical Contest in Modeling. I worked in various segments of the financial industry all around the world (New York, London, Hong Kong, Shanghai and Hangzhou), in the fields of investment banking, supply chain finance, Anglo-American law trusts, civil law trusts, and private banking. At the age of 26, I was able to work my way up in a state-owned bank. Prior to leaving, I was the general manager of the private bank and was responsible for over 30 billion in assets. After these great experiences, I decided it was time for something new, something bigger. That is when I founded Fortuna.
Can you tell me something about the direction blockchain is going?
Whenever you ask someone if they know bitcoin, the answer is yes, however many are unaware of blockchain and many of the other coins and tokens. Sometimes, talking to people outside of the blockchain industry feels like talking to “Muggles” from the Harry Potter franchise. They are not fully aware yet of the magic in our world.
However, in the past two months, more and more people around me started showing interest in ‘digital currency’. I also realized that the people started to believe more and more in the success of the blockchain technology. Today I’ll talk about how I turned into a blockchain “believer”!
My first experience with blockchain was in 2013, I wanted to do an Utransfer project for Transferwise. The Utransfer project primary goal was to use the Internet to solve the problem of excessive cross-border exchange costs and too slow efficiency.
However, after communicating with the related departments at that time,
it came to light that this type of business could easily be characterized as an “evade foreign exchange control” (2013 RMB internationalization was not yet a major development strategy and foreign exchange control was very strict). Thus, the project never started.
At that time, I noticed that a technology company named Ripple was listed at MIT Technology Review. Ripple used blockchain technology to solve the problem of cost and efficiency of cross-border payment. After that, the story must have been fully understood. Ripple is already the third largest blockchain project in the world. From that time on, I started to learn and understand the blockchain. As I was engaged in the financial industry, I became more aware of the blockchain industry. I began to really realize and recognize the blockchain and the value of blockchain’s Killer App “digital currency”.
The phenomenon of “rent-seeking costs” and “low efficiency” in the financial industry is too common. In a big jargon, it is “taking a lot of money, things are done slowly,” and the blockchain is not so much a subversion as it is an improvement. The degree of centralization is gradually weakened, allowing more people to “pay less money and do things faster.” In terms of space, I only share one case today: Commercial Bank (a form of modern credit organization-the most mainstream financial intermediary that is close to people’s lives), and its core business model and disadvantages.
“The economic crisis is an inevitable product of the capitalist system”
In our childhood, the teacher taught us: “Marx said that the economic crisis is an inevitable product of the capitalist system.” However, as I grew up, I discovered that there are also economic crises in socialist countries. In fact, there have been about 60 economic crises in the history of mankind. Originating in the credit market, stock market, foreign exchange market, commodity market, etc. All are closely related to the proliferation of liquidity. The most important two ways of the proliferation of liquidity are M0 and M2.
The most basic business of commercial banks are deposits and loans (internal banks call it debt and asset businesses). However, how many people carefully considered the core difference between deposits and loans?
What is a loan?
In short, it was the bank that gave me a sum of money. Over time, I returned it with interest to the bank.
What is a deposit?
In a nutshell, it was me that gave the bank a sum of money. After a period, the bank returned it to me with interest.
Repeat the paragraphs mentioned above and you will find that, in addition to the different direction, the two are almost the same. In essence, A gives B a sum of money. Over time, B returns it to A with interest. So your deposit is actually not a “deposit”, but your loan to the bank. Therefore, your deposit appears as a “liability business.” in bank’s view.
This business model may be one of the most intuitive and close-to-life sources of economic crisis from your side: commercial bank credit expansion.
“Interest” and “deposit” are incompatible
A long time ago, some wealthy families had hidden a lot of gold bars in their homes. To keep their gold safe they decided to buy a safe. They bought safes that were too big to house all the gold.
As a result, they began to accept the trust of their friends to keep their gold bars and charge some custodial fees accordingly. This resulted in the birth of earliest form of a “bank.”
What are the responsibilities of this rich group with safes? They had to take care of the gold bars and keep them safe from others. What kind of fees did they charge? They charged safekeeping fees for housing the gold bars.
Currently we deposit our monthly salary in the bank. Have you ever thought of giving the bank a custodial fee? On the contrary, the bank will pay you interests, and you will take it for granted. Why? Because everyone knows that the bank will take out deposits to lend out and make profit. This is the bank’s financial intermediary position and core business model.
Have you ever wondered whether the business model and the custodian’s responsibility are inherently contrary? Will you take your family’s sapphire necklaces in custody and allow others to use them casually? So why did you give your salary to the bank, knowing the bank would lend it to other? The answer is because the law allows it, and you are used to it.
The law allows banks to use the “law of large numbers” to make money. Banks feel that it is not necessary to leave all their money in the safe as they are, because it is unlikely that everyone will be able to withdraw everything on the same day. Thus the bank is able to take a portion of the deposit to loan. What is the difference between this and “fund misappropriation?” Actually, there is no difference between the two. Historical governments have legitimized this fund misappropriation through a “fractional reserve”. This “legitimate misappropriation” is the basis for the development of the bank and is also a feature of modern credit organizations. It’s also one of the root causes of the economic cycle.
In our final analysis, if you think about it really thoroughly, you will find that interest and savings are out of tune.
As stated in the Introduction to the Business World:
“Bankers, Greedy Gluttons”
As a profit-seeking company, obtaining the privilege of legally misappropriating funds, the bank’s profitability will inevitably cause it to continuously absorb and lend. This is where the economic cycle starts. (this is the reason why various governments set up banking supervision departments). Because the bank’s lending activities are essentially a kind of currency creation behavior (money misappropriation), especially the lending of current deposits.
It is not the same as an investment. When you invest 10,000 yuan in cash to a company, you think that the company has 10,000 yuan in cash, but instead you have lost 10,000 yuan in cash, and some more equity. But when person deposits 10,000 yuan in cash in a bank, he may think that he still owns the 10,000 yuan, and he can withdraw it at any time. Immediately after the bank has already lent his 10,000 yuan to others. The borrower who got the bank a loan of 10,000 yuan also thinks that he already owns the 10,000 yuan. Therefore, at the time of lending, the world has somehow added 10,000 yuan “virtual currency”.
But this is not where the cycle ends. After the person who borrows 10,000 yuan pays 10,000 yuan to others, it will be re-deposited by another person to the bank for 10,000 yuan, and the bank will use it to lend again. Again the world has an additional 10,000 ”virtual currency”. This is the money creation ability of the so-called bank — the money multiplier.
It is exactly this credit expansion lacking savings that has consisted of the fundamental reason why our economy is in a cycle between prosperity and recession in the light of false prosperity, because credit expansion is bound to end with the credit crunch, just as people have joys and sorrows.
In fact, until Cipolla’s Florentine Monetary Policy in 14th century came out, people gradually realized that there was another kind of “virtual currency” in society, that is, M2 we are now familiar with.
From this point of view, take a look at the core value of Killer App “digital currency” in blockchain, I think it will be particularly interesting.
Thanks for reading and see you next time!
Brian Cai.
Talking about Digital Currency TOKEN according to Virtual Currency M2
Hello everyone! My name is Liangbin (Brian) Cai, I’m founder and CEO of FORTUNA. I’ve started a series called ‘Founder Blogs’ to share some of the ideas me and my team have, that do not fit anywhere else. Welcome!
After graduating from Yale University, I won first prize at the International Mathematical Contest in Modeling. I worked in various segments of the financial industry all around the world (New York, London, Hong Kong, Shanghai and Hangzhou), in the fields of investment banking, supply chain finance, Anglo-American law trusts, civil law trusts, and private banking. At the age of 26, I was able to work my way up in a state-owned bank. Prior to leaving, I was the general manager of the private bank and was responsible for over 30 billion in assets. After these great experiences, I decided it was time for something new, something bigger. That is when I founded Fortuna.
Can you tell me something about the direction blockchain is going?
Whenever you ask someone if they know bitcoin, the answer is yes, however many are unaware of blockchain and many of the other coins and tokens. Sometimes, talking to people outside of the blockchain industry feels like talking to “Muggles” from the Harry Potter franchise. They are not fully aware yet of the magic in our world.
However, in the past two months, more and more people around me started showing interest in ‘digital currency’. I also realized that the people started to believe more and more in the success of the blockchain technology. Today I’ll talk about how I turned into a blockchain “believer”!
My first experience with blockchain was in 2013, I wanted to do an Utransfer project for Transferwise. The Utransfer project primary goal was to use the Internet to solve the problem of excessive cross-border exchange costs and too slow efficiency.
However, after communicating with the related departments at that time,
it came to light that this type of business could easily be characterized as an “evade foreign exchange control” (2013 RMB internationalization was not yet a major development strategy and foreign exchange control was very strict). Thus, the project never started.
At that time, I noticed that a technology company named Ripple was listed at MIT Technology Review. Ripple used blockchain technology to solve the problem of cost and efficiency of cross-border payment. After that, the story must have been fully understood. Ripple is already the third largest blockchain project in the world. From that time on, I started to learn and understand the blockchain. As I was engaged in the financial industry, I became more aware of the blockchain industry. I began to really realize and recognize the blockchain and the value of blockchain’s Killer App “digital currency”.
The phenomenon of “rent-seeking costs” and “low efficiency” in the financial industry is too common. In a big jargon, it is “taking a lot of money, things are done slowly,” and the blockchain is not so much a subversion as it is an improvement. The degree of centralization is gradually weakened, allowing more people to “pay less money and do things faster.” In terms of space, I only share one case today: Commercial Bank (a form of modern credit organization-the most mainstream financial intermediary that is close to people’s lives), and its core business model and disadvantages.
“The economic crisis is an inevitable product of the capitalist system”
In our childhood, the teacher taught us: “Marx said that the economic crisis is an inevitable product of the capitalist system.” However, as I grew up, I discovered that there are also economic crises in socialist countries. In fact, there have been about 60 economic crises in the history of mankind. Originating in the credit market, stock market, foreign exchange market, commodity market, etc. All are closely related to the proliferation of liquidity. The most important two ways of the proliferation of liquidity are M0 and M2.
The most basic business of commercial banks are deposits and loans (internal banks call it debt and asset businesses). However, how many people carefully considered the core difference between deposits and loans?
What is a loan?
In short, it was the bank that gave me a sum of money. Over time, I returned it with interest to the bank.
What is a deposit?
In a nutshell, it was me that gave the bank a sum of money. After a period, the bank returned it to me with interest.
Repeat the paragraphs mentioned above and you will find that, in addition to the different direction, the two are almost the same. In essence, A gives B a sum of money. Over time, B returns it to A with interest. So your deposit is actually not a “deposit”, but your loan to the bank. Therefore, your deposit appears as a “liability business.” in bank’s view.
This business model may be one of the most intuitive and close-to-life sources of economic crisis from your side: commercial bank credit expansion.
“Interest” and “deposit” are incompatible
A long time ago, some wealthy families had hidden a lot of gold bars in their homes. To keep their gold safe they decided to buy a safe. They bought safes that were too big to house all the gold.
As a result, they began to accept the trust of their friends to keep their gold bars and charge some custodial fees accordingly. This resulted in the birth of earliest form of a “bank.”
What are the responsibilities of this rich group with safes? They had to take care of the gold bars and keep them safe from others. What kind of fees did they charge? They charged safekeeping fees for housing the gold bars.
Currently we deposit our monthly salary in the bank. Have you ever thought of giving the bank a custodial fee? On the contrary, the bank will pay you interests, and you will take it for granted. Why? Because everyone knows that the bank will take out deposits to lend out and make profit. This is the bank’s financial intermediary position and core business model.
Have you ever wondered whether the business model and the custodian’s responsibility are inherently contrary? Will you take your family’s sapphire necklaces in custody and allow others to use them casually? So why did you give your salary to the bank, knowing the bank would lend it to other? The answer is because the law allows it, and you are used to it.
The law allows banks to use the “law of large numbers” to make money. Banks feel that it is not necessary to leave all their money in the safe as they are, because it is unlikely that everyone will be able to withdraw everything on the same day. Thus the bank is able to take a portion of the deposit to loan. What is the difference between this and “fund misappropriation?” Actually, there is no difference between the two. Historical governments have legitimized this fund misappropriation through a “fractional reserve”. This “legitimate misappropriation” is the basis for the development of the bank and is also a feature of modern credit organizations. It’s also one of the root causes of the economic cycle.
In our final analysis, if you think about it really thoroughly, you will find that interest and savings are out of tune.
As stated in the Introduction to the Business World:
“Bankers, Greedy Gluttons”
As a profit-seeking company, obtaining the privilege of legally misappropriating funds, the bank’s profitability will inevitably cause it to continuously absorb and lend. This is where the economic cycle starts. (this is the reason why various governments set up banking supervision departments). Because the bank’s lending activities are essentially a kind of currency creation behavior (money misappropriation), especially the lending of current deposits.
It is not the same as an investment. When you invest 10,000 yuan in cash to a company, you think that the company has 10,000 yuan in cash, but instead you have lost 10,000 yuan in cash, and some more equity. But when person deposits 10,000 yuan in cash in a bank, he may think that he still owns the 10,000 yuan, and he can withdraw it at any time. Immediately after the bank has already lent his 10,000 yuan to others. The borrower who got the bank a loan of 10,000 yuan also thinks that he already owns the 10,000 yuan. Therefore, at the time of lending, the world has somehow added 10,000 yuan “virtual currency”.
But this is not where the cycle ends. After the person who borrows 10,000 yuan pays 10,000 yuan to others, it will be re-deposited by another person to the bank for 10,000 yuan, and the bank will use it to lend again. Again the world has an additional 10,000 ”virtual currency”. This is the money creation ability of the so-called bank — the money multiplier.
It is exactly this credit expansion lacking savings that has consisted of the fundamental reason why our economy is in a cycle between prosperity and recession in the light of false prosperity, because credit expansion is bound to end with the credit crunch, just as people have joys and sorrows.
In fact, until Cipolla’s Florentine Monetary Policy in 14th century came out, people gradually realized that there was another kind of “virtual currency” in society, that is, M2 we are now familiar with.
From this point of view, take a look at the core value of Killer App “digital currency” in blockchain, I think it will be particularly interesting.
Thanks for reading and see you next time!
Brian Cai.
