Bitcoin Forum

So, we do not see any fractional reserve banking yet. All the banks are full-reserve.

Which banks are you talking about, exactly ?

Mtgox and mybitcoin.

How do you know they are 100% reserved ?

Anyway, it might be a good idea to do it.  The banker could make money on transactions and the deposit could be rewarded with an interest.  This would be a comeback to basics of banking.  It could be fun and educational.

I would not be interested as an investor anyway, for I've always prefered equity shares than debentures.

Neither of them are "banks". They do not make loans, charge, or pay interest.

mtgox is obviously not full reserved since LRUSD and bank wires aren't dealing with the same currency, and you can fund your account with both.

I think those activities come naturally once you start collecting and storing money from the public.

When you collect money from the public, you can not just sit on that money, doing nothing.  It would be a waste of resource.  You will eventually decide to do something with it, without telling your clients if necessary.

That's why banking is usually described as an unseparable set of apparently different activities :  collecting, storing, offering credit and so on...

Hmm, how do you verify the integrity of banks?

Well, you're supposed to trust a bunch of bureaucrats who will audit the bank and check that everything is in order and that the accounts have not been falsified.

I disagree. Full reserve holdings companies do exist, and they don't necessarily go fractional reserve "naturally".


That largely depends on the agreement that you have with the organization that is holding your money. If a breach of the agreement happened the "bank" (or e-wallet company, whatever), would quickly lose the public's trust and fast become worthless/useless.

Of course if it were done silently only a run on the holdings would make that information known. This is an entirely different topic. lol

I might be wrong here, but I heard that under traditional islamic laws, usury, and thus lending for interest are forbidden.

http://en.wikipedia.org/wiki/Islamic_banking

After seeing that money as debt video, that sounds like a pretty good thing !

In case of Bitcoin, the banks can give out wallet backups for each user to ensure they're full reserving.

Uh huh.

FYI: The topic of usury has been discussed on these forums before, and in great depth.

It was also frowned upon by other religions too. It was punishable by death in many regions of the world.

Earning money, just because you have money, was seen as parasitic.

Loaning is fine. It's just losing my saving due to fractional reserve banking that I am worried about.

Well

From mybitcoin's terms: (https://www.mybitcoin.com/open-account.php (https://www.mybitcoin.com/open-account.php))


Translation: Not a bank.


Translation: The Bitcoins in your mybitcoin account belong to you.


Translation: Full reserve.

Yes, they *could* steal and plunder and be a bunch of pirates but that would ruin their reputation. Why would they put all of this effort into this project just to toss it all away?

I, personally, don't keep my Bitcoins there. I use their merchant tools because they seem to be the best ones out there so far.

Notice that nothing prevents an islamic banker to lend your money (with no interest of course), to someone.

This means that you could also lose your savings with this system.


There's nothing wrong in fractionnal reserve banking, as long as the customer knows what is is doing.  He is giving his money to someone else.  There is necessarly a risk involved.

Well, I am definitely going to petition banks I used if I can download their wallet at least one time everyday at anytime I want.

Well, they'll tell you you can.  Truth is you won't.

What I mean is that even with a bitcoin bank, despite the technical possibility for a customer to withdraw his funds at any time, statistical laws can be found, allowinng the bank to determine an optimal reserve ratio.

Yes and no. I suspect that spends between users at the same e-wallet (I don't like calling them "banks".) company are not handled the same way as regular Bitcoin client spends. The wallet file backups would be incomplete or not entirely accurate.

For example, I've noticed that when I get Bitcoins from a regular client to mybitcoin's SCI I can see the amount on the block explorer. When I get Bitcoins from another mybitcoin user I don't see it on the block explorer. They must just move bits around in their database instead.

I have seen both of the money as dept videos, while I thought that it brought up many issues with the current baking system, the rational why usury is bad extended to nothing more than "It is bad, because it is bad, mmmmk."

There is nothing wrong with loaning somebody something and expecting a payment in return; if people decide that usury is wrong and enforce it, they infringe on my right to conduct voluntarily transactions with other people.

When a bank uses the money deposited in it for loans, it therefore has risk.  Thus they offset that risk by giving it's depositors a proportion of the income gained upon it.  If somebody deposits into a bad bank and the money is lost, it is their own fault, they obviously didn't audit the bank thoughtfully enough!

A bank that uses fractional lending should qualify for more risk on deposit, so a higher return should be demanded from deposits.  The system is simple, and there is nothing economically or morally wrong with it.

The key difference in the bitcoin world of banking is that instead of trading promises of bank account amounts between people (eg. bank money / checks / cash), you trade the real thing, e.g. bitcoins.  So the world of bitcoin at it's foundations is solid.  If a bitcoin bank goes down, only those who use the 'bitcoin bank notes' and those who have deposited in it will be effected, not everyone like the current cash system.

The bitcoin banking wold will work identically to when we had banks who stored and loaned gold, and all the transactions were conducted in gold also.  However, gold is physical, bitcoin is not.

Any other suggestion on how to verify the integrity of banks/e-wallet/whatever.

+1

A 3rd party audit. That's probably the best way.

A 3rd party audit is just a displacement of the trust from the bank to an auditing company.  It doesn't solve anything.

A single "this is our safe" address + BBE

EDIT : + a published list of anonymized accounts with their respective balances, every user should find his own and the sum should be equal to the balance of the "safe" address

Sure. Now we are back to 'reputation' again. Why would the auditor lie and risk tarnishing their reputation?

That isn't a bulletproof plan either. The e-wallet company could just lie about the number of accounts in their database so that those figures more or less line up with the BBE.

Hmm.. If the public could track a spend's lineage into and through an e-wallet provider, that might work. A "BBE" specific to mybitcoin, for example.

It could upset the users because it would remove some of their privacy. You'd be able to see spends between e-wallet users and tie their commerce together.

It's not an easy problem to solve. lol!

Which free "bank" / "e-Wallet" services are there:
MtGox
MyBitcoin
dragons.tl

any others?

For up to 100 BTC, ClearCoin.appspot.com escrow is free, and in a way could be used as an e-wallet.

Vekja.net has one too.

Because the banker might have paid him to do so, for instance.

Sure. It can and does happen. I was merely remarking on the paradox of trust. (You can audit and auditor that audits another auditor.. ad infinitum...)

Lucky for us, we have the option to trust no one by holding our own wallets with the Bitcoin client. :)

No, the users can collectively verify that the data is good :
hash of my account id lined up with my balance is easily verifiable.

If one single user comes up and says "i didn't find my account id hash, or it had incorrect balance" you know the bank is cheating.

How do you cheat that ?

You'd omit accounts from the list that haven't been used or logged into for a long period of time. ;)

Edit: Oh, and you're assuming that the e-wallet provider is storing all of the Bitcoins on one address. That may not be the case.

Nope, you couldn't really cheat like that because maybe I deposited 10 BTC in an inactive account to catch you red-handed.
And you could only do that with accounts with small balances therefore reducing your cheating ability.
So high risk of getting caught, not so great benefit.


You don't even need the BBE part to check for the absence of fractional reserving anyway.
You'd need BBE to check that what you send to the address that is given to you remains as balance of that address, which should be the case I guess with the accounts functionality of the client.

You can't deposit 10 BTC into an inactive account and still call it inactive. ;)

Lets say that you were proactive enough to leave 10 BTC in an account for a year just to try to catch an e-wallet provider cheating. Say the e-wallet provider published its books right now. You would have had to known this exploit a year ago. Did you really think about this a year ago? You lose.


If the e-wallet provider were caught and backed into a corner they could say that they exclude inactive accounts from their reporting algorithm because it skews their statistics or something. Most of the users would believe it was a sort of accounting mistake and keep using it. They would move on to finding another way to cheat. (We are assuming they are evil for the sake of discussion, remember.)


Again, you'd be missing spends between users at the same e-wallet company. The balances would not line up. This would not provide adequate proof of anything. Read this thread again; the part where I talked about why giving users a backup of their own wallet files wouldn't work. It's the same reason.

Hopefully the place where i put my saving lasts more than one year so that's a non problem.
also s/inactive/inactive after an arbitry amount of time has passed/


No, because that would be a basic accountability rule : publish a report, on demand that shows anonymized accounts along with their respective balances. Skewing statistics is irrelevant here because such a report wouldn't be about statistics, we're assuming publishing *all* the account balances are published since it's part of the hey-check-it-out-for-yourself-we-don't-do-fractional-reserve set of rules.



Of course not, if a user sends funds to another user, the sum of the balances of the full account balances report will still end up as the exact same figure.


With a couple of honeypot inactive account this system just works.
(Or even if the "bank" thinks there are going to be honeypot accounts).

They could very well modify and improve their "inactive account" algorithms to profile smart/stupid people based on habits, useragent strings (geeks use linux or something lol), etc. It could leave the inactive accounts that belong to smarter clients in the holdings report, and drop the accounts that belong to what the system believes to be stupid people. It would drastically reduce the chances of getting caught.


I should clarify. I meant for their own internal statistics. Spends per hour, funded accounts, etc. If they excluded inactive accounts from their statistics (well, they fall off the stats because they are inactive) they could use that as an excuse for excluding them from a published holdings report when "called out" by the public. (Blame it on a software bug.) Those unreported coins could be siphoned off by spending the difference to a new master bc address and publishing a bogus report. The bogus report would check out and the BBE would confirm that the total holdings match the bc address.

They could even put up a hash checker on the same page. When someone goes to calculate their hash with that handy tool it would just add them to the list on the fly (assuming they aren't already on it), and move the activity date up on the account. lol! I just thought of that one.

Of course the entire list could be published as a flat text file that is PGP signed with the date/time inside of it. That would keep it from being changed on the fly. lol


Sure, but that doesn't matter if you can exclude some users and spend those coins behind the scenes.

Anyway, it is better than nothing. I'll agree with you there. I just think there are ways to steal if one is very creative. You assume that everyone else is as skilled as you are. Most of the people who will be drawn to e-wallet systems will be people who are basically non-techs that want to use Bitcoin. They are the easiest to steal from unnoticed.

This could go on and on and I do need to sleep sometime. :P

Cheers!

Accounts with significant balances are likely to be closely monitored as I said, so there wouldn't be much to gain.
Also this can be easliy beaten by having to publish a list of opened/closed accounts, so everyone can check the counts match, if suddenly an account is missing in the global balance sheet then that means that it has to be accounted for somewhere else where it can be scrutinized.

If a bank wants to hide an account it has to take the risk that someone is going to find out their account has been claimed as closed. Not worth the risk.



That would be plain stupid, it would make for an even worse reputation : "we do banking, our software is buggy, yea you can trust us".
So that's a non issue.


Even stupider idea of them to do such a thing, the day someone double checks they're dead.


Point is you can't :)
If you advertise the fact you're not fractional reserving, and you put such control mechanisms up there's no way you could effectively cheat and gain something worth a tenth of the risk out of it.


The good part about that system is that it can be automated and checked by a third party who has no financial incentive in addition to random skilled people checks.

A whistle needs only to be blown once :)


I need to go do some fiat currency paid work :p

A synchronized audit by everyone who has an account in those banks.  Secretly pick and have everyone agree on a random time (without the bank's knowledge), and at that time, simultaneously login to the bitcoin bank (or mybitcoin, or mtgox, or whatever), and have everyone withdraw all their bitcoins.  If that bank is unable to provide anyone's deposit on demand, then they are in breach of contract and are thus criminals.  Sue them, ostracize them, or use (legitimate) violence against them.

David Friedman addresses the problem of inflation caused by private banks in the book "Future Imperfect". Here is the section:
http://www.daviddfriedman.com/Future_Imperfect/Chapter6.html

"Some economists, in rejecting the idea of private money, have argued that such an institution is inherently inflationary. Since issuing money costs a bank nothing and gives it the interest on the assets it buys with the money, it is always in the bank’s interest to issue more. The rebuttal to this particular argument was published in 1776. When Adam Smith wrote The Wealth of Nations, the money of Scotland consisted largely of banknotes issued by private banks, redeemable in silver.5 As Smith pointed out, while a bank could print as many notes as it wished, it could not persuade other people to hold an unlimited number of its notes. A customer who holds $1,000 in virtual cash – or Scottish banknotes – when he only needs $100 is giving up the interest he could have been earning if he had held the other $900 in some interest-earning asset instead. That is a good reason to limit his cash holdings to the amount he actually needs for day-to-day transactions.

What happens if a bank tries to issue more of its money than people wish to hold? The excess comes back to be redeemed. The bank is wasting its resources printing money, trying to put it into circulation, only to have each extra banknote promptly returned for cash – in Smith’s case, silver. The obligation of the bank to redeem its money guarantees its value, and at that value there is a fixed amount of its money that people will choose to hold.

Let us suppose that all the paper of a particular bank, which the circulation of the country can easily absorb and employ, amounts exactly to forty thousand pounds; and that for answering occasional demands, this bank is obliged to keep at all times in its coffers ten thousand pounds in gold and silver. Should this bank attempt to circulate forty-four thousand pounds, the four thousand pounds which are over and above what the circulation can easily absorb and employ, will return upon it almost as fast as they are issued. (Wealth of Nations, Bk I, chapter 2)"

So, organized bank runs. That would do the trick. :)

but you couldn't organise that in secret, could you? you would give the bank at least a few days of warning by starting the organising.

so either you not find not enough customers for your bank run - bank wins.
or you alert them in advance and they can take measures - bank wins.

Historicly, it was competing banks that organized runs on a bank that they suspected of cheating.  They didn't need to tip off the bank in question, simply accumulate their banknotes and hit them hard with as many at once as possible while spreading a rumor that said competitor was insolvent.  The term 'viral' was never used in this context, but that's exactly how we might describe such an event today.  Once one was set off, the bank under attack wouldn't likely be able to take measures.  If they could, then they were not insolvent, by definition.