how do banks store digital money ?
Let’s suppose a central bank gives 10 million dollars to a local bank.
How is this money saved?
It just a excel spreadsheet with the amount of the money writted in?
What prevents the local bank to just edit the “spreadsheet” ?
Is there any sort of protocol or agreement between the central bank and local bank,
Like a blockchain or something?
In: Economics
Well, it’s kinda a spreadsheet, just a bit more dedicated.
The “we have X money” isn’t the thing that is stored. The Data is “We have X money, of wich we got Y from bank Z on April 10, and …”
The source of the money is stored, and can be backtracked to an outgoing transaction in the other bank. So to cheat in extra money you would need to have a source from where it came, and it’s easy to figure out that this transaction never happened if you have access to the records of the other bank.
For this reason banks to regular internal audits to verify if all the money in accounts is actually legitimate.
Funfact: my judge relative had a case where a bank employee created a bunch of fake transactions transferring cent amounts from thousands of accounts that had been inactive for years. He was caught because that weird pattern of tiny transactions was found in such an audit
It isn’t just a spreadsheet. The central bank would increase Bank As current account balance by 10 million. Bank A can then transfer it to other people, or banks either to receive a bond, originate a loan or something similar, or to receive physical cash.
Bank A cannot increase their balance at the central bank. They could claim their balance at Bank B is higher than it is, or they can claim their assets are worth more than they are, but this is not really bank specific. And they couldn’t withdraw the money.
Well there are systems in place developed over hundreds of years to ensure this kind of thing is very difficult to do.
1) Banks/Companies don’t record “balances”. The first step is are “order” documents. This is usually some paperwork or record.
2) Then this order is entered as a “journal” entry. This is the record of the transaction itself. These journal entries of course, also record who made these entries and are stored permanently.
3) Then the ledger are adjusted according to the journal entry. Because all systems nowadays uses double entry accounting, each ledger transaction involves a debiting account and a crediting account. These accounts must all balance.
And, of course, both parties (sender/receiver) do all of the above. So a “single” transaction involves at least 6 records (usually more) each of which is stored and and be used to reconcile the other. For security reasons, almost no single person would have access to records in all these separate databases. All banks are required to have regular audits and all accounts are regularly reconciled which would highlight any balance or transaction discrepancies. (eg $10,000,000 shows up in an account with no order or journal entry would immediately show up) Bear in mind that with electronic databases, every manual entry is tagged with the credentials of the person making that entry.
So to “spoof” the system, it requires a lot of access and knowledge to disguise all these records – something that is nearly impossible to do without being discovered. It may not be immediate but there is now software that can go through millions of records and are programmed to detect odd patterns of transactions etc. When it comes to money, there is a lot invested in security.
The bank requests funds from the Discount Window or its automated through the overnight lending system if the bank has it setup with an “overdraft service”.
The physical currency is ordered from the Bureau of Engraving & Printing; then stored in one of the regional Federal Reserve Banks or Cash Management Contractors vaults. Theres a Cash Management System to track that. If the bank needs the physical currency then they order it through cash management and it is delivered by couriers.
There’s an Account Balance Management System linked with the Risk Management System (which setups the lending limits and collateralization requirements for loans through the discount window and other lending programs). Those are used to track the balances and funds.
It works very similarly to how retail banks work when customers request loans or currency.
You can think of a Central Bank like the Federal Reserve Banks as the banks’ bank.
edit: typso & clarification.
this may help:
[Federal Reserve History & educational info.](https://www.federalreservehistory.org)
When you deposit money into a bank, it doesn’t go into some dedicated compartment in the vault and it hasn’t been that way for hundreds of years.
Banks use double entry book-keeping. Every transaction is carefully tracked and reported. Your balance is tracked in a “book”. Before computers, this was a physical book. Now, it is done on a computer.
Editing the balance of an account without tracking the change with a transaction is illegal. It is bank fraud. It was possible before computers and it was illegal back then as well.
People seem to think that since the invention of computers that perhaps bank fraud is easier and maybe money is no longer real. This is not a new problem. People have been regulating banks for centuries. If your bank became known as a fraud bank, then everyone would withdraw their money. Computers also help in tracking transactions and implementing the regulations.
I have worked in banking for 12 years now, and banking is extremely scrutinized by the government and various agencies. For example even a simple payroll deposit to your account is recorded on the Federal Reserve which we can run reports on to see who sent it, to whom, for how much, etc.
Then legally we have to keep records for years (most are 7 years). Then the system automatically creates reports that we use to research on a separate system. And there are multiple servers so if one has an issue, the other takes over.
Part of that requires having redundancy and checks and balances (multiple people/departments check each other) to ensure everything is being done to compliance. No one person has control of your money. For example the ledger that is used for incoming ACHs is reconciled by a completely different area of the bank. Finally, we are audited regularly by internal and external auditors.
> What prevents the local bank to just edit the “spreadsheet” ?
The auditor: “That’s cool, but can you point out which incoming transaction that extra 5 million dollars are from?”
Bank manager: *sweating* from Other Bank.
Auditor: and if I call them, will they have an outgoing transfer matching it?
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