How to be a bank

Custodianship naturally evolves into payment systems

What is a bank? Based on the name, banks are custodians, in other words, they hold onto something for you. In order to do this, the first step required is that you have to be able to identify yourself to the bank. So the first technical challenge of banking is identification. The bank must be able to identify you reliably to hold onto your stuff.

Identification

There are many ways to do this, and there are always tradeoffs involved. They could give you a password, but passwords are easily lost or stolen. Another option is to simply remember what you look like, but then the bank requires keeping an employee around who knows you personally. A third option is to rely on another party to keep track of your identity.

Often, the bank itself won’t be responsible for identity management, but instead rely on some other system like governmental photo ids, or a state database. This way, the bank only has to keep identifying information, like your full name and birthday, and if someone imitates your identity that is crime that the government will try to detect and punish. This saves significant costs for the bank and reduces their own risk of error or fraud.

Storage

Once you are able to identify yourself to the bank, the next thing they have to be able to do is store something for you. A bank is essentially a database, for both physical and financial assets. The…