Mises Wire

Technology Replaces Fractionalized Banking

Starving entrepreneurs in Silicon Valley are now being bombarded with offers of capital from Angel investors. Forget the old-school meet the banker and walk ‘em through the business plan nonsense, this can all be done electronically through social media.

“I thought, we’re dealing with Internet start-ups here, there has got to be a better, more efficient way to evaluate them than to do thousands of coffee meetings,” Naval Ravikant tells the New York Times. “Coffee should be the last step, not the first.”

Two years ago Mr. Ravikant and a partner, Babak Nivi started AngelList, “a networking Web site that substitutes endless pitch meetings with Internet-based matchmaking.” It’s like online dating for entrepreneurs and investors. More than 1,300 investors have signed on.

The next logical step for this kind of high-tech tool is for technology to replace fractionalized banking and the expensive regulatory apparatus that keeps it in place. Technology has broken down physical borders and started revolutions, it can certainly direct savings from lenders in one part of the world to borrowers somewhere else.

AngelList has 20 start-ups from all over the world joining the site every day.

As this business model is honed and the technology advances, there will be no reason for local bank’s deposits to be loaned out while the depositor believes the funds to be held safe and sound at the bank. Instead of the combined deposit and loan banking system we have now, technology will separate the two as they should be.

Deposit banks would hold funds for safekeeping, with depositors paying a fee for this service. Those needing loans would go online and seek capital from those who willing forgo the use of their funds for a certain time period to fund the requested loan that they would approve at the terms and conditions acceptable to both. The borrower could be a farmer in Iowa, the lender an investor in Istanbul.

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