Bitcoin Forum

Has anyone considered the possibility of establishing a Bitcoin Credit Union? It would operate much like a traditional bank might except the account holders would have dividends paid to them quarterly. It would be a way for everyone to make a few extra Bitcoins and also contribute to the welfare of the community in that there would be a loan aspect to it.

What do you think? Could it work? Would you join?

 The only question I would have is, what is there for sale that someone would want to borrow money in order to buy?

Well, I would imagine they might borrow money for all of the things they currently borrow money for. They would use the credit union instead of a traditional bank because 1) the credit union might offer a lower interest rate and 2) it might offer higher dividends to members than their local CU does.

Other than that, it might operate very similar to a traditional fiat based CU.

Pretty much anything, after currency exchange.

Basically if bitcoin rates are low, this offer would allow bitcoin carry trade.

I don't really have a "chief" thread to link to - perhaps this (http://bitcointalk.org/index.php?topic=4863.0) one would do - but there have been several discussions about the inherent challenges of loaning Bitcoins, most of which boil down to "how can you have a system of trust when transactions are anonymous?"  Have you chosen a strategy to deal with this?  Or would it be less of an issue with credit unions for some reason?  (To be honest, my understanding of CUs vs. banks is a rusty.)

The issue of maintaining anonymity while still being somewhat fraud and theft resistant is one I've wrestled with and I'm not really sure there's a way around it. If you're anonymous, there's no way to verify your identity or to find you if you skip off with the Bitcoins. Even charging a membership fee like most CU's do doesn't assure anything except you'll have the membership fee if they skip off. Not really valuable if they take 50,000btc or something.

It's going to take some thinking but there has to be a way around it.

Anthony

Credit Unions are a response to modern banking.
Since we don't have modern banking in the bitcoin community why not go back to the Building society or Friendly society models  ;)

I don't see any issue.  Just GPG sign a loan contract and publish it.

That still doesn't solve the question of identity. For example, I could generate a GPG key for 'Johnny Daniels' and sign a loan. Without some sort of way to validate some traceable information about this person, having a signed document doesn't really mean anything. Or am I missing something?

For now I don't see a Bitcoin Credit Union as a possible thing even if it's totally non-anonymous.

If you lend me say 1k BTC and you live in US while I live in Romania...You can have my e-mail, my skype, my real address, my cc number but nothing would make me pay if I don't want to.

I've seen "reputable" people doing all sort of things to skip a simple restaurant bill, imagine what would be the choice of one of these guys if he had to choose between buying something real for his familly or paying a guy 2 continents alway who can be totally ignored with a few clicks of a mouse.

Reputation would not be on you, as a physical human being.  It would be on the GPG public key.

Basically people will think "I know that the guy, whoever he is, who uses this GPG key has always paid his debts.  So I guess I can trust him to pay this one."

If you lose your private key, then you'll lose the associated reputation and you'll have to start again with a new, zero reputation key.

Interesting and I can see the point. But how does implementing one of those models relieve fraud? It addresses voluntary mutually benificial associations but still doesn't really provide a way to stop someone from walking away with the bitcoin and never repaying. Sure, they could do that with non-digital money too but it's a bit harder since we have to provide identity information for a traditional loan.

Thoughts?

Right, I get that. So would the reputation of your GPG key be akin to a credit rating of sorts? Would the CU use the key's reputation as  a means of determining the eligibility for a loan?  In that case, every new customer would essentially start with zero reputation since there would be no 'credit history' for the key.

Anthony

That's probably the main issue a BTC CU would face. But what about if we had more of an 'association' of credit unions. Maybe one in the EU, one in North America, one in South America, etc. Would that provide a legal way to mitigate the risks? If it were anonymous, I would think not unless there was some way to maintain anonymity while still providing SOME traceability, that could work, couldn't it?

Anthony

Reputation would not be anything formal.  For each public keys, there would be some data about successful or failed loans.   It's up to you to use this data and give a credit rating.

And yes, every one would start from a "zero reputation".

By the way, such a system has already started on #bitcoin-otc.

Interesting. So then, in that case, perhaps such a CU doesn't deal with totally new keys with no reputation just like a bank or traditional CU wouldn't be quick to deal with a new loan applicant with no credit. Perhaps some sort of algorithm that figures in the age of a key and the plus/negative for repaying other loans could be used to develop a risk model. Definitely interesting. I'm going to read up a bit on trust systems tomorrow and see how this might be doable in an anonymous way.

Thanks for the great comments...

Anthony

The reason why I ask what there is to buy is because normally you take out a loan for a house or car. These are collateral in case you don't pay the loan back. What is someone going to borrow BTC for, drugs?  It is not as though I need alpaca socks today, but want to pay tomorrow. I imagine someone who wants to borrow money for drugs would be the sort of person who would be the least reliable in paying it back. Such a credit union would accumulate liabilities and losses, not profit and dividends. There may be a time and a place for that but it's not now.

You can always cash out and buy things in the fiat markets
For example - mining gear.  ;)

"Anonymous" would not be the correct term.  You'd rather talk about "pseudonymous" credit system.

Your pseudonym would be your GnuPG ID.

In an anonymous network, all nodes are equivalent and you can't tell them apart.  In a pseudonymous network, they are not, but you just don't know anything about them except their ID, which can be as meaningless as a random number.

Meh, sounds like a load of pedantry to me. Heh heh. I guess it's good to know specific labels every now and then but in the end it's best to just take the message for what is if you understand it.

Well, ok,  I was a bit pedantic here.  Labels don't matter that much.

There is also some relevant technical discussion in this thread: http://bitcointalk.org/index.php?topic=5027.0

That's the main problem ALL lenders face.

I have been on both sides of that equation, in various capacities. In reality, I think everyone has their thresholds. Most people, most of the time, have every intention of paying, and even doing so on time. However, everyone has a threshold at which point they need to make a decision, pay the loan, or pay for something else. There is also a ceiling where its not a decision, and they just can't pay (at least, on time). Sometimes the threshold is above the ceiling.

Some people, have very low thresholds, others, have just have very low ceilings. As a lender, these people are pretty similar in their effects. Certainly, its much easier to feel sorry for people who get laid off, have deaths in the family, or other events that leave them unable to pay than say, someone who blows it partying and doesn't put the time and effort in to even find a job. However, the end result is the same whether they have a good song and dance or not.

Anyway here is my thought. A credit union is usually also a bank. So, registering an account, and keeping that account open, moving balances in and out, all that, adds up to a certain credibility in and of itself. What if, instead of just being a normal bank that's borrowing from peter to lend to Paul, what if you allowed depositors to be investors in the loans to spread the risk and profit.... and only lend to other customers who have been doing business there for at least say... 6 months to a year.

It only helps so much.... when a business dies, it dies, when income goes away, it goes away, and sometimes these are unpredictable to the person it happens to, never mind to his creditors. However, it does at least establish some history and credibility to weed out some scammers and some of those who are just too desperate to be making promises at repayment.

Credit Unions ... Nice .. FRACTIONAL BANKING ALL OVER AGAIN .. the bubble begins, slavery and death to all


Stupid idea .. that's why we use BTC, Gold, Silver ... if you don't like it ... go back to Fiat.

People folding on loans won't ruin Bitcoin. Unlike in the real world, the banks will fail and the government won't be there to pick them up. Loss will be mostly isolated.

Bitcoin is real, unless you mean the Fiat world?!

Fiat, government-inflicted world.

Fractional reserve banking is not necessary.

Investors (credit union members) make an initial deposit into the credit union. The stipulations for investing is that you can not withdrawal your money for a certain period of time. The reason for wanting to invest is profit from interest. So, the bank is funded. It can then loan out money. When the money is paid back, interest is added. The interest is returned to the investors as profit. Since the members own the credit union, all of the profit goes to them. Of course if there are extra expenses, they will be taken from the profit.

As you can see, this is far different from depositing money into a bank that does with it whatever it pleases. Investments and loans are an important part of an economy, neither of which requires anything close to fractional reserve banking.

I think it's a fantastic idea with many hurdles to overcome to function properly.

You don't understand what fractional banking is... Nor do you understand why it's a problem.

It's common sense to take a collateral for a loan. This may require the transaction to be done in the open. From my stand point, a Bitcoin CU would operate the exact same as a regular CU, only that it lends Bitcoin. Certain financial practices require for the parties involved to be known. The anonymous aspect of Bitcoin is a plus, but not a necessity in itself. And frankly, the anonymous part is really icing on the cake. As long as your funds can't be ceased or frozen, you're exposing yourself to much less risks by dealing in the open.

The beauty here is that there does not have to be majority rule. If you have a solid idea... go for it... even if it's not anonymous. Let those that don't wish to participate choose not to, or come up with a better idea. I think many will participate as is.

As a historian of the credit union movement, I think this idea is the bee's knees. I'll be curious to watch for new developments...

A key element might involve the creation of many credit unions, as one of the original bases of the movement was that the members of the organization shared a "common bond," which ensured that members would be generally aware of each others' financial situations, and that there would be social consequences for people who default.  As such, perhaps you would have many small "credit unions," and if any one has a surplus of deposits or credit demand, they could make inter-institutional loans through a meta-credit union that would be owned co-operatively by the credit unions.

Fixed time period deposits, such as CDs, are perfectly compatible with 100% reserve banking.

If people actually wanted loans of bitcoins, you deposit money in the bank.  You cannot withdraw it for 1 month, 3 months, 6 months, whatever.  I loan the money to a group of other people over a similar time period.  When your time is up, you can renew the CD or you can cash out and get your interest.

No problems there.

I could see borrowing bitcoins for trading purposes as well.  If you want to "short" a bitcoin, you borrow one, you then sell it to someone else, then buy back when the time is up at the end.

Shhhh...... Don't give away the bank here.

Shorting is where the money is, especially when you can cause the rate to go down.

I just posted some observations on this idea over at the Credit Union History blog: http://cuhistory.blogspot.com/2011/04/bitcoin-natural-experiment-for-credit.html

I have no job, no income, and I'm broke.  My credit is therefore way down.  When I HAD employment I tried to keep up with all of my bills, and maintained a pretty good credit rating.  Having a bad credit rating, these days, actually makes it harder to get a job, harder to get a place to live, etc.  How could I possibly build up BT credit?  Or reputation, if you are talking about a trust system, like Web of Trust.  I was given 0.5 BTC way back when I first started on my own BTC journey.  Since then I've received and spent a total of 8 BTC, or something, even though at any given point I rarely had more than 1 BTC in my wallet.  Does that mean I've built up some trust?  I dunno.  Could I borrow and pay back a bitcoin?  Then borrow and payback two?  Then three, etc.?  Incrementally working my way up?

If someone gave me enough BTC to purchase and run my own mining rig, I'd be able to Earn BTC and pay a monthly amount till I finally pay off the loan.  And I'd do that, and not skip off with the BTC, because the incentive of being Trusted for higher and higher loan amounts is far better than the horrible feeling I'd have from stealing all those bitcoins and losing all the trust I'd built up over time.

Credit unions are a nice idea, but credit requires something bitcoin cannot supply at present: stability.

Is anyone going to be willing to bet that bitcoins won't change by an enormous amount over 6 months?

If they go up, the borrower is screwed as the btc/hour of their work falls, but the debt doesn't.

If bitcoins go down, the lender is screwed as the borrower just spends a few dollars to payback what was originally (say) a car loan.

Credit denominated in bitcoins is years away.

How about a BTC pawn shop. You could establish one with partners all over the world . Partners could get a nice piece of the commission to verify and store the property and the central pawner would supply the BTC. You would only need to trust/verify the partners and not every customer.

"credit requires something bitcoin cannot supply at present: stability"

Thank goodness for that, debt as we're seeing is a pain in the butt. I think there can come a point where centralised banking and money printing is fixed by bitcoin but all the problems we had before (now) come back just the same.

Still, if you wanted to do this you could store reserves in gold and just do the transactions in Bitcoin, or perhaps prepaid debit cards denominated in fiat.

Certainly true.  I don't think bitcoin is a financial panacea.  It might one day stop governments from doing (some) stupid things with our money; but it won't stop us ourselves doing stupid things with our money.


It might mitigate the problem slightly as (at present) those things that you've named are more stable than bitcoin; but none of them has retained value exactly.  Gold has rocketed up over the last few years; if you'd borrowed gold in 2007, you'd be feeling queasy now (assuming you spent it).  If you borrowed fiat on the other hand, you'd be pretty happy.  Your bank... not so much.

If there is one good thing about all this fiat inflation it is that my bank foolishly denominated by mortgage in fiat.  HA!  Win for me.  Not so good for the savers.

I don't see anything wrong in principle with bitcoin banks and credit unions, in the sense of businesses that, through some kind of mechanism, pay you interest on your BTC while finding people they can loan to at (higher) interest.

But it's still getting way ahead of ourselves.  Before this kind of Bitcoin bank can exist, the Bitcoin economy must be a lot more mature, to the point that both lenders and borrowers can gauge what their payments/income would be in real terms.  That requires higher liquidity and lower volatility than currently exists -- and, of course, wider acceptance.

At this point, the only function of a bank that you need is to keep your money safe so that e.g. when your government inflates your currency, you can convert back out to the inflated units.  But you can already "be your own bank" in that sense, without any financial intermediary, simply by following regular protocols for backing up your wallet, running a client, etc.