Bitcoin Forum

Yesterday i was discussing with friends about Bitcoin and i got to a point, where i need your help.
I was always claiming, that with Bitcoins there is no interest rate possible, since the amount of coins can t be influenced by an evil power like banks.
And no inflation means no interest rates are possible.

And since inflation and interest rates  are the tools, to make the world go insane by a constant demand for economy growth i am sure we would live much better without them.


But now one of my friends said, that with Bitcoins its still possible to have a system of banks, that own a lot of Bitcoins and lend them to people for interest rates.

Let me give you an example:

There are thousand Bitcoins available. They all belong to the bank, and they lend 500 to a person for 10% of interest. Now the person has to give 550 Bitcoins back. But since the bank still has 500 BTC and he has the other 500 BTC those 50 BTC don t exist. He can t give 50BTC back and without pressing money they will never be there.
But what if he says to the bank, that he can pay the 50 BTC in another trading good like gold or cows or giving the bank owner a massage (service).

Wouldn t this still be as evil as the system we have right now?

Is it evil to rent a house?
Is it evil to rent a car?
...
Is it evil to rent a sum of money?

When you take out a loan, you're just renting, and paying rent to a 'landlord' (the owner of the coins).

That rent can be in any form; If no BTC are available, then pay your rent in massages if that's something you and the owner can agree on.

But bitcoin is a currency with deflation. If mtgox takes 500 btc, and returns 500 btc after some time, then it loses money. To compensate for deflation, mtgox should return only 95%-98% of bitcoins, keeping the rest.

That would only be true if it exchanged the 500 BTC for USD, then after some time (when the loan was due), bought 500 USD worth of bitcoins to repay the loan.

They wouldn't lose a thing if they just held the 500 BTC and then repaid it.

Would you rather have 1 BTC today or 1 BTC tomorrow? Of course, you'd rather have one today. Because with one today, you can either spend one today or have one tomorrow. So if a bank wants 1 BTC from me today, it had better give me more than 1 BTC tomorrow. Otherwise, I'm giving up my opportunity to spend 1 BTC today for nothing. That's wasted value.

There are so many false premises involved in this argument that I have no idea where to start.

Yes, there can be interest in bitcoins, and there will be interest in bitcoins.

No, interest are not bad.

No, you dont need inflation to pay for the interest. As an example, you can pay a loan of 1000 bitcoins with a money supply of 600 bitcoins. Money circulates.

Hahaha. No.

Whether the currency is deflationary or not, 1 BTC today is always worth more than 1 BTC in a month. Because with 1 BTC today, you can have 1 BTC in a month or you can spend before that. So it has, today, whatever the value of 1 BTC in a month is expected to be plus whatever value there is in being able to spend it before that.

A currency cannot predictably deflate. It's like saying "gold is $1,000/oz today, but we all know it will be $5,000/oz in a year". That's impossible. People who didn't need money immediately would buy up all the gold until its price came very close to $5,000/oz now. Any *predictable* deflation will have already happened and its expected present value will already be bundled into the present cost.

1 BTC today includes the right to sit and hold that bitcoin and watch it appreciate in value. You can, of course, exercise that right by holding it. But you can also sell it to someone else for whatever the fair market value of that right is.

The reason BitCoins have been going up is not because of the deflation built into them but because they have been increasing in popularity, thus increasing the probability they will ever actually experience the deflation built into them.

You don't need to be able to increase the money supply in order to have interest. You can have more debt than money and it can all get paid back. Of course even if you couldn't pay back all debt plus interest without growing the money supply you could still have it, you'd just have defaults.

I loan you $8, you owe me $10 with interest, you buy a bucket from me for $6, you wash my car, I give you $5, you pay me back $5. Later you wash my car again and I pay you $5, you pay me $5 and the debt is gone. You can have unlimited debt on any amount of base money. There never needed to be more than $8 in this 'economy'

Thank you, I was too lazy to write down the whole example.

What it is true is that under a deflationary system there is less incentive to go into debt so usually there is less debt in a deflationay system that under a inflationary system. Inflation promotes debt. But there are other factors that influence as well.

How do you figure? In an inflationary system, interest rates are higher.

No do not introduce Interest into the Bitcoin market. The whole concept of interest is what is destroying the real fiat currencies of the world (USD, CAD, etc). It would last for awhile but eventually destroy the whole BTC economy..just look around the real world to see examples of that. Why not just setup the Banksters here too....NOT.

Thats what i mean. What is preventing the Bitcoin economy from becoming the shitty and evil thing our dollar economy is right now?

i replace this with a brainfart.... san mind was not thinking correctly

No.

Usually real interest rates are lower under inflationary system becuase usually the newly printed money comes in through loans. Because banks have more money to loan real interest rates are lower, at least for a while (during the bubble phase, when the bubble pahse is over interest rates skyrocket).

While it could seem that more loans is better, its the contrary. Inflation stops growth because it creates malinvestments.

Is it evil to rent a sum of money?  In my opinion, absolutely!  Because interest to be paid on your loan, in simplistic terms, doesn't exist.  You must pay back the original principal + interest.  The interest portion doesn't exist and cannot be created out of thin air.

We, and the world, is in so much debt due to interest we can never pay back.  We should learn from history and not repeat the same mistakes.  Unfortunately, history always repeats itself and we'll also screw ourselves with bitcoins too.  Sigh.

so profit doesn't exist either, eh?

jeez...a bunch of economic illiterates trying to run a currency.

work for  a car company. take out a loan from them to buy a car from them. earn part of their profits for your work in the future and pay back the loan with interest

everything "existed" and nothing is created out of thin air. as simple as this is, the real world works the same there are just more intermediary steps.


if bitcoin will ever be widely accepted, there automatically will banking, there will even be fractional reserve banking, there will be interest.

Never said profit doesn't exist.  Profit is just an increase in value.  You can create profit by adding value to something either by effort, time, resources or demand.

Lending money for money creates nothing of value.  Money is simply a medium of exchange.  Adding interest to money is a sure way for someone to get it all in the end, much like we'll have soon in the reality of this world.  Explain to me how can every country be in debt?  The only way for someone to get out of debt is to put someone else in even more debt.  The game is rigged and we are all losers when interest comes in play.  Interest is an insatiable monster that will eventually swallow everything, including the lender.

Lending money is also a great way to create slaves...Usury, was once punishable by death.  That's when they use to understand what it caused.  Now, most don't give a f*ck as long as they make something for nothing, much like the speculators.  Good luck with that.

This is false, as several people have noted before in this post. Re-read the answers.

Totally agree with the bold part above

The increasing intrinsic value in a deflationary currency should take care of anything and more inflation does to safeguard fiat currencies.

put aside your ideology and try to think for a moment.

you didnt say profit doesnt exist, but you imply that by saying the interest portion of a loan doesnt exist.
profit requires running a business, running a business requires capital, like machines. the guy who provides machines ( = the money to buy them) doesnt like to take that risk for free. his compensation is interest and is payed from the business' profit.

nothing is out of thin air, and nothing of this is evil.


nonsense.

I don't have anything against bitcoins per se.  They can be, and probably will be, a form of money.  That doesn't mean that banks won't lend you money or that interest will go away or fractional reserves won't work.  These games will be our undoing and are separate problems we'll have to deal with.  Personally, I chose to remain debt free at all times, can't stand interest, or bankers for that matter, and I don't want to get caught in that evil downward spiral.  I don't owe anyone jack sh*t and love it that way.

It's the way the game is played I don't like.  http://www.youtube.com/watch?v=SUkwntLNTOU#t=12m38s (http://www.youtube.com/watch?v=SUkwntLNTOU#t=12m38s)  Watch the whole video, it's quite interesting.

Just to be clear, nobody is saying that debt is always good, nobody is defending the present monetary system, comparing the present levels of debt and specially the way it comes about to slavery is quite accurate. Nobody is disagreeing with you there. I personally try to stay away from debt as much as I can as well.

The problem is that some justifications you are giving are objectively wrong, false. That is what the people here is trying to point out.

+1
the problem is really debt for consumption, as opposed to using capital for production.
and I'd include government consumption here, often enough incentivised by central banks.

Can I suggest that the number of you who think interest is bad go and read some Bastiat.

He wrote all about this subject when the French government was discussing banning interest on capital.

You can even read it for free; I think it's available on mises.org.

Alright i decided to get some ground info on our banking system and started to watch this video which explains our system pretty well:

http://www.youtube.com/watch?v=GMPPeWYL5uk

I am a little relieved since it explains that the main problem of our time are not interest rates, but the creating of money out of nothing from debts. You might have to watch the video to understand what i mean.

And this money creation can t be done with Bitcoins. :)


Well now i believe in Bitcoins again. They will make the world a less corrupt place, and we can be part of this ;)

I thought about that, too. My conclusion: A bank who gives loans to people is impossible, because it cannot enforce that people pay back their debts.

Even if you know the identity, what are you gonna do? Torture him to release his passwords?

Funkypala, welcome again.


There are ways to enforce contracts through private institutions. First, you have ostracism. If someone violates a contract he/she will find it hard that other people trust him/her and trade with him/her. So there is an incentive to respect contracts. Second, you have the legal system, the courts. This legal system can be a government monpolly or private. It would be a long to discuss both systems, but basically the bank can use the legal system to enforce the contract.

Yes, but even after a court decision a million policemen are not able to wrench the money from your hands.

The problem is that then you probably can not trade in that jurisdiction anymore. Obviously its not unheard for some people to not pay the debts. In Europe a lot of people, specially inmigrants, have fleed the country leaving the unpayed mortgage behind. But they can not expect to come bank ever. Some people might preffer to pay the debt than to go away from their home, family and friends.

Islamic banking has an interesting take on usury. I think this reference is interesting in the context of this discussion:

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

"The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets."[18]"

I just noticed also that we already have a bitcoin bank just round the corner, that pays interest. They don't say how much though!

http://flexcoin.com/

Someone mentioned fractional reserve banking... although it could exist with bitcoins, I don't see the same advantages.  While I need a bank to protect my $millions (I wish) and make transactions for me, I could do that myself with bitcoins.  I also don't need interest to maintain my wealth as bitcoins are inherently deflationary.  Actually my biggest concern with bitcoins is the incentive to hoard instead of spend or invest.  You might not see that as a problem but it hasn't ever been tried AFAIK so it's a leap of faith at least.

Sorry but I can't take seriously a 'bank' that runs on wordpress! ;D

I'll assume for a moment that there will be bitcoin banks and such.

I think it is a misconception that bitcoin is inherently deflationary. it very much depends.
with bitcoin only the base money supply is constant eventually. that is less inflationary than all other fiat currencies, but it doesnt mean there is no inflation. there can be, when banks do what banks do: create money by creating credit.

see the money supply definitions M1-M3.


even if bitcoin is the currency I doubt bitcoin will be the method of payment of the end-user, more like the back-end of banks and some enthusiasts. so banks basically do what they do now, except their refinancing would be vastly different because there is no central bank, which is the most interesting part of bitcoin and a huge difference.
but besides that I don't think that much would change.

It's just a wordpress placeholder... the site goes live July 1st... and it won't be running wordpress other than it's blog section....  we're not putting the live code up until it passes the security audit...  

It's an active miner,  and is in a few pools and on it's own as well (graphics card mining across several machines)...  what it does is pay interest in the form of dividends that are earned for accounts that have a positive balance in there...

No one is going to get rich from what they get as interest,   but that combined with deflation should be helpful for most individuals.

http://flexcoin.com is the first Bitcoin Bank that pays interest ...  granted it's "funny" how it does as compared to a traditional bank, but it's the first time in history a bitcoin account pays interest..  you'll see the site change look and feel by July 1st.

I've never understood the compulsion to enact a usury system with bitcoin.

Its like insisting a car has to have a harness for an animal to pull it. Get your heads out of the bank-washed system of 'charging for money', just for a second, eh?

i see the utility in accepting 'promissory notes' and how that paper currency system has been transmuted into fiat.  i don't see why the end user would accept payment in place of bitcoin when they could just accept bitcoin, except for instant POS transactions where a provider would take a small fee.


Seriously though, you'd have to be nuts to deposit your hard-earned coins into an unregulated, untested, unknown 'bank', with no backing and no guarantees run from god-knows-where, just for a tiny bit of interest.   Where I am going to turn to when you steal all my money?  I'll have to tell the bitcoin forum and everyone will laugh in my face.

not sure I see what you mean.
bitcoin and its flooding algorithm doesnt scale well. the developers acknowledge that and talk about "leightweight" clients that trust another node for their transactions - that's a bank.
I fail to see what that has to do with promissory notes.

there are many other reasons joe schmoe would not communicate with the bitcoin network directly, but scalability alone would be enough.
your wallet/mobile phone/whatever-device you use for payments will not hold the entire transaction database of the whole world.

In the current system, you can lend out like 10x your own reserves.  If there's a run on your bank, the central bank will print more dollars and keep you afloat.  That can't happen in bitcoins, because there's no printing new bitcoins (above what mining does).

So, if banks lend out more than they have, they will go bust in periodic bank runs.

This means *far less* lending, because depositors to the bank are far less secure.  Thus, they will demand higher interest rates.  (Yes, even though the currency is deflationary, interest rates would be very high because of this risk.)  So, there wouldn't be so much easy credit.  The housing crisis probably never would have happened, for instance.  If something like that did happen, the fed wouldn't have increased the money supply by trillions, which is why you get .5% on a savings account right now: you are competing as a lender with the Fed, who is giving select big banks basically free money.

But there will always be risk-taking in any economy, always bubbles, always human irrationality.  No currency can stop that.  It's driven by human psychology and the dynamics of exchange.

Very false. Lending money now, in return for more money in the future, helps individuals who need money now and rewards individuals who would rather have money in the future. Not only is this a "valuable service," it is a fundamental part of an economy.

Consider the most basic example - One man has some money, but no need to spend it. Another man has no money, but a great business idea. Both men can be made better off if the former lends money to the latter at an agreed-upon interest rate. The former man will have more money than he otherwise would, and the latter man will have the opportunity to try his business idea, succeeding or failing in the process.

Without interest, there is no incentive for this exchange to occur, and thus it would not, and thus both men (and the world) are worse off.

Don't demonize interest. Demonize fiat currencies.

If that's your choice, then good for you. For other people, borrowing money can be immensely helpful. Debt is not intrinsically an "evil downward spiral," just as a hammer is not intrinsically harmful. Irresponsible use of any tool will tend to cause pain, but one shouldn't blame the tool itself for improper usage.

false. bitcoin banks can lend out 10x, too. if there is no minimum reserve requirement imposed on them, they can lend out 100x or 1000x if they want to - and if they find enough stupid people who deposit coins with them.

there is no "printing" involved when commercial banks create money. look up base money supply and the money multiplier.
money multiplier can be > 1 in a bitcoin economy, too.

factional reserve banking isnt a problem in itself. the problem is that govts insure the risks of it, so noone even cares where his money is deposited and what kind of stupid shit his bank does with it.

BINGO

Right.  We don't desagree here.  They can, in principle, lend 10x reserves, but they have to find depositors who are willing to take that kind of risk.  Who in their right mind would keep a savings account generating .3% APR when the bank is lending 10x their deposit, if there is no FDIC, no Federal Reserve?  Read the rest of my post.  They'd charge exorbitant interest rates for this and still may face bank runs.  (That's why FDIC / Fed came about in the first place, to calm that wild west shit.)

Good luck trying to run an actual bank that lends 10x reserves.  You'll need a hell of a marketing team.

How could they lend 10x what they have? At the moment the banks can create digits out of nothing if you lend money from them. But how should that be possible with Bitcoins?

The only way, that i can imagine is that they give you a "electric bill" that says its wort x amount of btc. These "electric bills" could be created out of nothing. But i can t seem to imagine someone would be so stupid to take a "electric bill" instead of the bitcoins.


In former times these debt based bills were more practical, than some gold or silver that lays in a safe. And thats why they were used. But there is no reason to use an "electric bill" instead of a safer electric currency that can not be created out of thin air.

Thanks to the new bitcoin system, you can't create money out of thin air like the banks do today.  Nor can bitcoins earn interest (unless someone is willing to part with their coins to pay for it.)

Think of it...the banks create money out of thin air, with absolutely no risk to themselves and get paid interest on it.  And when I mean no risk, the contract you sign explicitly says you will pay...or someone else will  They purchase insurance, which YOU PAY so that THEY GET PAID if you can't.  LOL, absolutely no risk whatsoever.

I love bitcoins because they are decentralized.  After securing my bitcoins, I have absolutely no need for a bank.  May they wither and die a horrible painful death, those c*cksucking leeches.

If you have to borrow to get what you want, then you're living beyond your means.  Don't sell your soul to the devil for a short gain.  That burden of debt is gonna weight heavily on your back for a long time.

that's a myth, perpetrated by youtube videos and conspiracy theorists.

they don't just add digits, what is referred to as money creation by commercial bank is that money they lend out usually ends up as deposits at the same or another bank.
bank account balances are considered money, so if you depoit 100$ and they lend out 100$ to someone who puts it in his bank account, there are 200$.

the same thing could happen with bitcoins. bank account balances of a fractional reserve banking are nothing else than claims you have against the bank. but they are considered "money" by most definitions, so the base money supply is multiplied.

How could that happen with bitcoins? If the bank lends 100btc to someone, then he hast the btc and the bank has 0 btc. If he then deposits them on a bank, then there are 100btc.  No btc were created. 100btc in the begtinning 100btc in the end.

Would you rather have $500 next year or $500 today? $500 today includes the right to have $500 next year if you want, but also includes the ability to spend the $500 before that if you should choose to do so. You *have* to charge for money because money tomorrow is worth less than money today. Interest is the mechanism that makes investment possible.

there are still also 100 btc in the account of the depositor whose money was used for lending. -> 200 btc in bank deposits.
no BTC were created on the bitcoin network of course. but in the same case with USD no USD were created by the central bank either.

in both cases, it's just two people who have a deposit of 100 each at the bank ( = 200), even though there was only 100 in the beginning.

this is entirely related to the definition of money: not only central bank money (equivalent to "money on the bitcoin network) is money, but bank deposits, too.
even 2 year govt bonds are considered money by some definitions(aggregates). so if you buy a 2 year govt bond for 1000$, you give 1000$ to the govt and you are holding 1000$ worth of bonds - both of which are considered money and the money supply increases by 1000$ to 2000$.

there really is no "printing of money" at commercial banks, neither with bitcoin nor with USD.

this kind of "money multiplying" is encouraged by central banks and the FDIC, so it might be less in a bitcoin economy. but that's another story, and who knows for sure. it could exist though, so this is no difference from the current system.

You deposit 100 bitcoins in my bank. You still have 100 bitcoins, they're just on deposit. I then lend out your 100 bitcoins to Jeff. He now has 100 bitcoins. So the original 100 bitcoins is now 200 bitcoins.

If Jeff owes Jack 20 bitcoins, he can transfer 20 from the 100 he borrowed. If you want to pay Alfred 20 bitcoins, you can transfer 20 bitcoins from your account to Alfred's account. So the bitcoins in your account work just like real bitcoins even though they're not. Of course, when you (or Alfred) withdraw money from the bank or Jeff pays back his loan, the number of bitcoins in circulation is reduced.

Essentially, bitcoins in banks (which are just numbers in a bank's computer) work almost the same as real bitcoins. The effect the supply of bitcoins (for price purposes) almost exactly the same way.

One tendency of bitcoins that may reduce this is that they are easily transferable without help from a bank. One of the main reasons people keep money in banks even for short term use is to make it easily transferable (checking accounts). If this doesn't happen with bitcoins, then the ability of banks to create bitcoins will be much less than it is for dollars. If banks lay their own storage and transfer system on top of bitcoins, to the extent people use that system, banks will be able to create bitcoins.

And, of course, if the currency is unstable (as bitcoins are now) banking won't be possible (except with offsetting shorts, which is very hard to do). So that stops banks from creating bitcoins. But that hopefully will change in the future.

Is it good to rent a house, when most houses are owned by a tiny percentage of people?  Even though they were built by a majority of people with minerals that are billions of years old?

When you take out a loan, you are just borrowing back from people who did real work that have had their work funnelled to a coke smoking banker who doesn't know how to hammer in a nail.

The exploitation can be in any form, if there are no BTC available you might need to pimp your girl to the fat man, something you can agree on.

Have you considered thinking outside the ridiculous assumptions that hold your paradim together?

PS

I can't spell, its outside my paradise

How could a "Bitcoin" bank run a fractional scheme? Person A deposits 100 Btc in Bank X; Bank X loans 95 Btc (5 Btc held as a reserve) to person B, person B buys computer hardware for 50 Btc who puts the proceeds in bank Y, and places the remaining 45 Btc in bank Z. Banks Y and Z can only circulate 95 Btc. As a Btc cannot be used several times simualtaneously the amount of Btc is still 100.

Whereas in a fractional reserve system a bank that recieves 100 USD can loan 950 USD to person B (50 USD held as a reserve), by issuing a check/digital loan, person B buys computer hardware for 500 USD and who put the proceeds in bank Y (either by "checking" or "digitally" - it is only a bookkeeping excersice, no banknotes are transferred) and places the remaining 450 USD in bank Z (maybe he will use the USD to pay wages a his IT firm) By these actions the money supply has increased despite the money base remaining at 100 USD. Fractional reserve cannot exist if the banknotes are transferred with each transaction.

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fractional reserve banking.

That is incorrect. The money supply now includes the 100 USD, which is still circulating, the 100 USD in person A's account and the 100 USD in person B's account. Person A can now pay for their groceries by writing a check, transferring money from their account to the grocery store's account, just as they can pay for their groceries with cash. Bank accounts function like cash, until someone withdraws, at which point money is destroyed.

This "created money" affects the supply of currency just like real hard cash does.

Granted, this is incorrect, however my intention was to show that:


is incorrect, as digits/checks are created out of nothing. As you say, person A can write a check to the grocery store, despite the funds in his account having been transferred to another bank, which means that the check/digits are created "out of nothing". Fractional reserve works in both of these two ways.

Discussion about the evils of interest or usury aside, it seems that just for the system to scale we need to have supernodes in the network. I can see that people could see these as providing some of the equivalent facilities of banks, such as itermediating large transactions. Naturally the source code for a supernode would have to be open and tamper proofed with cryptography.

I really don't think banking is going to dissapear from existence due to bitcoin. This would appear to be a very naive and highly unlikely prediction IMHO. There will always be have and have nots, and some kind of credit hierarchy. However, this could be seen as a great opportunity to forge a future in open and transparent banking that everyone can understand.

In many of the countries in crisis today the banks themselves are still not capable of balancing their own books!! They leveraged things so far out they literally don't know what they have done anymore. http://ftalphaville.ft.com/blog/2010/12/21/444026/anglo-irish-indigestion-off-balance-sheet/

this is fractional reserve banking with a reserve rate of 0 %, so in a strict sense you're right, it is "no reserve banking".

the are many different measurements of money supply. the money supply you're thinking about is the 21 million coins, aka the "monetary base". you're right that bank lending does not increase the monetary base.
but bank lending doesnt increase the monetary base of current fiat monetary systems either.

so if someone says "banks create/print money" he is talking about a definition of money supply that includes bank deposits (usually M1 - M3 definitions).
the answer to that is: bitcoin banks would, too.

no difference.

I am not quite sure that I understand how a Bitcoin bank would operate. I am under the assumption that banks would lend Bitcoins and not USD; if this assuption is wrong, the following excercise is not valid.

Let us say that: a bank accepts deposits and receive 1000 Btc from various depositors. They give loans, but owing to the fact that they do not have Btc or rather the codes that Btc are made up from, they can never lend more than 1000 Btc. If the bank lends 1000 Btc no depositor can withdraw any Btc; which means that 1000 Btc equals 1000 Btc and not 2000 Btc.

Let us say that the depositors did recieve checks amounting to 900 Btc (100 Btc kept as a reserve). Business A receives a check of the sum 200 Btc. Naturally, Business A wants to withdraw the amount from the bank with immediate effect; business A has many liabilties in USD. If the bank has already lent 1000 Btc 900 Btc it cannot pay out the sum of 200 Btc which the check holder is claiming.

A more "sound" business model would be to loan 700 Btc which leaves 300 Btc for immediate withdrawal. In this case the bank could earn e.g. 6% on loans, equalling 42 Btc, while paying e.g. 3% on deposits, equalling 30 Btc, and earn 12 Btc. However, at no point would the monetary supply deviate from the monetary base.

Even with a reserve (not fractional) of 300 USD, it would not be possible to write checks amounting to 1000 USD with the depositors (which would in effect render the reserves "fractional") as business A would wipe out 67% of its reserves with a 200 Btc withdrawal, after which only a very small amount of depositors or other holders of checks could withdraw Btc.

If the Bank instead makes loans in USD, although being extremely risky due to fluctuating Btc value, the bank could lend 1700 USD (today's Btc price being 17 USD), or even 5000 USD, and any depositor could still withdraw Bitcoins. However, no sane person would operate such a bank as if Btc value were to rise to 25 USD, and all depositors wanted to withdraw the 1000 Btc deposited, the bank must purchase Btc for a sum of 2500 USD (or more), whereas the interest on the 1700 USD would only amount to 102 USD (with a lendning rate at 6%).

We will find out... check it out, the first bitcoin bank: www.flexcoin.com (http://www.flexcoin.com)

The proprietor of www.flexcoin.com posted this in a differetn thread (http://forum.bitcoin.org/index.php?topic=21615.0;all)


It is, at least to me, unclear how flexcoin will use deposited Btc.

yes

there is no need to make it even more complicated and introduce interest rates in your scenario.
if my post wasnt intelligible read this: http://en.wikipedia.org/wiki/Fractional-reserve_banking#Example_of_deposit_multiplication

replace "central bank money" with "21 million coins" there and you'll have what a bitcoin bank can do.

Wiki is actually not entirely correct in its explanation:

"When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of m1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank's reserves, the m1 money supply expands by the size of the loan.[2] This process is called deposit multiplication."

"An equal amount of new commercial bank money is created" and "a loan made by the commercial bank...which keeps only a fraction of the central bank money as reserves" does not equate. If a fraction of central bank money is kept as a reserve, loans of commercial money of a sum higher than the central bank money equals "deposit multiplication". I.e. central bank money of a value of 1000 USD back commercial bank money of a value of 9000 USD (or any arbitrary sum).

The traditional role of fractioal reserve banking is thus as follows:

A central bank deposits of 1000 FED USD at a commercial bank; 9000 USD is created at the commercial bank.

A Btc bank cannot operate on the same basis due to my previous example:

"Let us say that: a bank accepts deposits and receive 1000 Btc from various depositors. They give loans, but owing to the fact that they do not have Btc or rather the codes that Btc are made up from, they can never lend more than 1000 Btc. If the bank lends 1000 Btc no depositor can withdraw any Btc; which means that 1000 Btc equals 1000 Btc and not 2000 Btc.

Let us say that the depositors did recieve checks amounting to 900 Btc (100 Btc kept as a reserve). Business A receives a check of the sum 200 Btc. Naturally, Business A wants to withdraw the amount from the bank with immediate effect; business A has many liabilties in USD. If the bank has already lent 1000 Btc 900 Btc it cannot pay out the sum of 200 Btc which the check holder is claiming."

So, since a bitcoin bank can't do fractional reserve banking.

And since they can't do anything I can't already do as far as bitcoin transfers are concerned.

What exactly is a Bitcoin Bank going to 'do' for me?

I'm sorry, I don't know how else to explain it. you're getting it wrong. I think you're confusing "central bank money/21 million coins" with money. bank deposits are money (by any reasonable) definition, the bank doesn't need to have all the "bitcoin codes" in order to have deposits on its books. they simply owe someone 1000 BTC.

I can sign a contract today I owe you 1000 BTC without having ANY coins. if I was a bank and those deposits were in a checking account under your name, that would be considered part of the money supply.

Anyone seriously interested in this topic should familiarize themselves with a whole lot of Steve Keen's research (http://www.debtdeflation.com/blogs/research/).

You introduced the "central bank money/21 million coins" theme, not me, and I am not confused by the concepts. Yes, of course a Btc bank could in theory operate on a fractional reserve basis, but they would be bankrupt within days of writing checks, unless they injected new capital and bought Btc to meet liabilites, making it a very unprofitable business.

Say you sign a contract with me today owing me 1000 Btc, and at the date of maturity, Btc have appreciated in value 25%, the monetary debt value is higher. Of course, if the value decreased the monetary debt value would be lower. No business proprietor would accept a check from a Btc bank which operates on a fractional reserve scheme, rendering it impossible to operate such a bank in practice.

I don't know what you're confusing, I only guessed. you're confusing _something_ because you're drawing the wrong conclusion.


value relative to what? to USD? to goods?
doesn't matter at all for banking.

I posted a critique of your suggestion that 100 Btc deposited in one bank could be lent and result in 200 Btc deing deposited in banks.


You have not addressed my critique, but instead injected concpets of "central bank money/21 million coins" and a 1000 USD contract. Are you going to address my critique of your sugguestion which is as follows:

"Let us say that: a bank accepts deposits and receive 1000 Btc from various depositors. They give loans, but owing to the fact that they do not have Btc or rather the codes that Btc are made up from, they can never lend more than 1000 Btc. If the bank lends 1000 Btc no depositor can withdraw any Btc; which means that 1000 Btc equals 1000 Btc and not 2000 Btc.

Let us say that the depositors did recieve checks amounting to 900 Btc (100 Btc kept as a reserve). Business A receives a check of the sum 200 Btc. Naturally, Business A wants to withdraw the amount from the bank with immediate effect; business A has many liabilties in USD. If the bank has already lent 1000 Btc 900 Btc it cannot pay out the sum of 200 Btc which the check holder is claiming."

I am saying that there is no possible way in any kind of viable banking operation that fractional reserve could be implemented; and that due to this circumstance, there is no possible way that 100 Btc deposited in a bank account could by any means equal 200 Btc in bank deposits.

"bitcoin codes": addressed above, post #66
withdrawals/cheques: if there are more withdrawals than reserves and the bank can't lend money from other banks (it usually can), the bank is insolvent.

this is part of what happened in 2008. illiquid outstanding loans/assets, interbank lending dried up and bank runs started to happen, until govts stepped in.

Yes interest rates with bitcoins are possible, you could have a bitcoin bank.
Having a bitcoin bank would require some sort of guarantee that you get paid back, and as such there is a risk involved.

The difference with bitcoins assuming a risk of 0, with very little interest you could make a profit, unlike inflationary currencies were you have to cover for inflation, but in real life the risk is not 0, so some interest would be needed for a loan otherwise you would have loses.