On January 3 of every year, the anniversary of Bitcoin’s (BTC) genesis block, the crypto space community participates in Proof of Keys. Users across the crypto space withdraw their funds from crypto exchanges and all other types of crypto platforms in order to ensure that their crypto funds are really there and that the platform they are using is not running on a fractional reserve.

Daniel Won from Exodus has proposed an interesting thought experiment.  What would happen if the traditional financial sector did the equivalent of Proof of Keys and everyone who used a bank withdrew their cash in order to make sure that the money was really there? The event could perhaps be called Proof of Deposits or Proof of Cash.

As discussed in a previous article on Crypto.IQ, previously banks in the United States had a reserve requirement of 10%, meaning for every $1,000 of actual cash a bank has they can lend out $9,000. However, amid the recent Coronavirus induced economic crash, the Federal Reserve lowered the reserve requirement to 0%.

This theoretically means that banks can have no reserves and lend out as much money as they want, so obviously if a large fraction of bank users withdraw their cash during a Proof of Cash event, the bank would go bankrupt.

Digging a bit deeper, banks are still holding reserves with the Federal Reserve to the tune of $1.65 trillion currently, although this is down from $2.75 trillion in 2014. There are other barometers of bank reserves on the Federal Reserve website, but they are all similar to the $1.65 trillion figure.

Simultaneously, the total amount of checkable deposits plus demand deposits held at banks in the United States is $2.238 trillion. Notably, this is down $90 billion since December 2019, and although that is a tiny fraction of total deposits, it was enough for the Federal Insurance Deposit Corporation (FDIC) to issue a plea for people to stop withdrawing cash from banks.

The total amount of savings deposits plus money market funds in the United States is much higher at $15.48 trillion, with total saving deposits alone being $10.3 trillion.

Adding savings and money markets plus checkable deposits and demand deposits yields $17.718 trillion of money held by banks in the United States that people theoretically could withdraw, and the reserves is slightly less than 10% of that at $1.65 trillion.

Therefore, doing the simple math, if 10% of all the money that banks owed to people was withdrawn at once, the entire banking system would go completely bankrupt.

At that point the FDIC would supposedly jump in and save everyone, but they only have about $100 billion in their deposit insurance fund, and if they exhaust that fund they have another $100 billion line of credit with the Treasury.

In other words, the FDIC may be able to handle small to perhaps medium sized banks failing here and there, but any large bank failure is enough to exhaust the FDIC, let alone if the whole system went bankrupt.

Therefore, a Proof of Cash event would go something like this: Even before 10% of the total money owed by banks to people is withdrawn during Proof of Cash, all the banks in the country would fail. The banks would immediately demand special regulations so that they do not have to honor anymore withdraws over perhaps something like $100-$1,000, like what is going on in Venezuela, Lebanon, and other 3rd world countries, and the banks would demand trillions of dollars of bailouts too, and they would probably get it. Then the leaders of the Proof of Cash event would be arrested and charged with high treason and terrorism. Simultaneously, the economy would resemble the Great Depression era or even worse.

Thus, if Proof of Cash happened, where everyone withdraws their money from the bank for a day, the math shows that it would be the end of the world as we know it, so it is probably a bad idea. That being said, it would be prudent not to keep large amounts of money in the bank considering that the bank basically does not have the funds to back up your balance. If you desire a digital way to hold money, then use Bitcoin (BTC), which is 100% backed and never runs on a fractional reserve if you hold it in your own wallet.