Bitcoin Forum

Fractional reserve banking type of things can be done with fungible items. Is there any change to bitcoin (or bitcoin style crypto) that would make fractional reserve banking or something else, impossible or harder to exist?

As some example, would Demurrage make it harder to happen?

EDIT: Reposted the question from wikipedia ( https://en.wikipedia.org/wiki/Wikipedia:Reference_desk/Humanities ) because I saw it would be a better place to ask those questions.~~~~

Realistically, there might be nothing stopping a similar system happening with crypto but the deflationary nature does stop it from happening exponentially quite a bit and limits the margins of the companies that can make use of it (they'd probably have to make the reserve the funds that they don't expect to just be moved off at some point - or a float they won't go below).

The fact you can readily and easily remove bitcoin goes somewhere to stopping the fractional reserve system from controlling it imo (the current banking system doesn't really allow for that as you're transferring funds between businesses fairly close to each other or have limits on how much cash you can withdraw at once from a certain branch).

What I can think of is the volatility and the asset it is valued against. If Bitcoin is operated as an asset which is calculated simply on its value, then a fractional reserve system could work, as money loaned in Bitcoin would be payable in Bitcoin.
So if Mr A deposits 1.5BTC, and the bank keeps 0.3BTC, while lending out the remainder to Mr B, who is expected to repay the 1.2BTC as well as the interest on it. Volatility would not be a factor as the value is of itself.

As a scenario, how do you imagine demurrage can affect its usability?

In fact, it has already happened in the past. Huobi and OKCoin have both been caught using users' deposits to invest in various high risk vehicles, meaning that they were no longer holding all the coins required to recover all their deposits, and were therefore fractional reserve: https://cointelegraph.com/news/two-chinese-exchanges-help-themselves-to-user-funds. I would bet every bitcoin I own that this practice is still ongoing on a number of exchanges. We also know other coins such as Tether are not backed up 1-to-1 as was previously claimed and are therefore fractional reserve.

As long as we have users trusting third party exchanges or web wallets with their coins, then we will always have the potential for a fractional reserve system to the risk of those users in question. The only way to avoid being subjected to fractional reserve is to hold your own coins. The only way to completely stop fractional reserve systems altogether is if everybody held their own coins.

The bank or whateaver lose money (like everyone else) with the demurrage and reduce the amount of money they have with itself to give back to people when they request "their money" back.

I think the phrase copied from Wikipedia needs an urgent addition of the source. You have been on the forum since 2017, and it’s a shame that you still don’t know about those little things, the ignoring of which is fraught with a permanent ban for your account.
Moreover, you expose everyone who answers your question of concern to the deletion of their posts along with your topic.

https://i.ibb.co/WVbKZ2g/Screenshot.png (https://ibb.co/g45gNRz)
https://en.wikipedia.org/wiki/Wikipedia:Reference_desk/Humanities

The thing with Fractional reserve practices is this... The Banks created money out of nothing, because Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers. Source : Wikipedia

You cannot create bitcoins out of nothing, because Bitcoin has a fixed supply and that cannot be changed without a majority vote from full nodes. They will never allow that, because that will reduce the value of the bitcoins they own now.  ;)

Bitcoin's fixed supply does limit FRB compared to fiat because the risk of collapse is greater as the reserve ratio goes lower. With fiat, there is an unlimited supply of money available to prevent a collapse so the reserve ratio can be 0.

It is not as simple, banks could do to bitcoin what they did to gold.

Step one: begin to accept gold and encourage people to deposit their gold with you arguing you can secure it properly while they cannot.
Step two: as this practice becomes popular people for the most part begin to use the certificates they got from the bank as money instead of gold.
Step three: since the amount of people asking for their gold back is low then keep a small amount in reserve while loaning the rest and multiply the profits of the bank, also known as fractional reserve banking.

And since this is something that could happen off the network there is nothing protecting bitcoin for something like this happening, the only difference is that the bitcoin network will keep on existing, so those which do not fall for this gambit will still be able to use their bitcoin as they want, but almost all bitcoin deposited on banks will never see the light of the day again as just an additional step is needed to make all those certificates fiat money by suspending your ability to exchange them for bitcoin.

Fractional reserve banking has extensive networks of credit background checks, agents for repossession of goods, government mandated subsidies for home and student loans. Et cetera. It has had decades to develop entire industries, regulation and laws which revolve around and support its native loan markets.

Bitcoin and cryptocurrencies in the present day, lack that support infrastructure. Which makes it very difficult, if not impossible, for a crypto based asset to do basic background or credit checks to know what rates or risk factors should accompany potential loan candidates. These are known issues cryptocurrencies have struggled with for many years. Without good solutions being found.

In past years, small crypto start ups tried to use ID based certification as a format for legitimizing loans. But I think most know by now there are websites and entire industries on the internet which are devoted towards making and selling fake IDs for "entertainment or humor purposes" only.

Banks and fractional reserve based industries have access to financial networks and credit scores, along with methods of legally forcing loan dodgers to eventually pay up. Crypto assets have always lacked that support infrastructure which has always prevented it from penetrating home, auto, personal and business loan markets. All of which are dominated by fractional reserve institutions.

We already see places like Robinhood and PayPal allowing users to purchase "bitcoin", except the only thing they can do with that bitcoin is hold it and then sell it back to the platform in question, meaning there is absolutely no way for the user to know whether or not the platform is actually holding any bitcoin or just giving them price exposure. It won't be long before there is an entire sector of people paying each other on one of these platforms or maybe an exchange such as Coinbase, sending "bitcoin" from their centralized account to a merchant's centralized account, without ever making an onchain transaction and without ever knowing if the bitcoin in question actually exists.

And as more and more people sign up to centralized exchanges and hand over all their personal information, including things like employment status and yearly income which exchanges are now asking for, then crypto exchanges will have access to all the same information that fiat banks have access to. I won't be surprised when we start seeing crypto exchanges performing credit checks on their customers before offering them services.

Maybe just make it hard for any company or bank to hold and solely control other people's Bitcoin. That will probably mean encouraging only non-custodial/decentralized exchanges and platforms.
In the end, It still boils down on sticking to Bitcoin or True Cryptocurrency principles

How can this possibly be enforced though?

We can encourage decentralized platforms and "Not your keys, not your coins" as much as a we want. But even after all the centralized exchange hacks, leaks, losses, scams, privacy invasion, KYC requirements, spying, surveillance, fractional reserve, accounts being locked, transactions being frozen, coins being seized and on and on, the number of people using such centralized services continues to grow. There will always be people who don't care about the decentralized nature of bitcoin and are just here to try to make profit, and will use any centralized platform which promises them unsustainable growth or returns. And there will always be people who despite the tens of thousands of users who have lost funds because of centralized platforms, will continue to use them to store their coins.

The only possible way to stop people using centralized platforms altogether would be to outright ban them, and regardless of whether or not you think such an outcome would be a good thing, we absolutely shouldn't be looking for more government regulation or laws regarding the bitcoin ecosystem.

Yes, it is called education, common sense and incentives. Fractional reserve could be something like tether backed by USD :)

Seriously, good crypto should be limited and there is no way you are going to accept someone lending you bitcoin with a "bitcoin certificate". If you know your crypto bitcoin means bitcoin in your wallet address and with your own keys. There is no way you can borrow more than it exists if you have taken even the minimum required time to understand what you are doing.

Is this not exactly what happens with people holding tokenized bitcoin, wrapped bitcoin, bitcoin on Ethereum, on Tron, on Binance Chain, or any of the other "not actually bitcoin" bitcoin tokens? Someone, often anonymous, promises to pay you real bitcoin in return for your fake bitcoin.

If you actually hold the bitcoin yourself, sure, but if it is tied up in layers of DeFi nonsense or something similar, wrapped up in altcoins, stuck in smart contracts, held by third parties, etc., then all that goes out the window. As I said above, the only way to avoid fractional reserve altogether would be for everyone to hold their own coins, but we both know that's never going to happen.

Isnt el salvador chivo wallet, fractional reserve style wallet as long you are trading from chivo wallet to chivo wallet?
If that is true (the fractional reserve stuff would be used to give people their 30 dollars in BTC at chivo wallet, they are giving people to make sure they try it), people already accepted fractional reserve.

Yes, there is. Fractional reserve banking is a feature of the traditional banking system. If you strictly follow Bitcoin's revolutionary banking philosophy, this old feature will no longer work. Why? Simply because, with Bitcoin, your funds are under your sole control and ownership. You are your own bank with Bitcoin. No other person or institution has the access to your funds.

Fractional reserve banking is really a system which legally allows banking institutions to fool the people, to play with their money, and creates wealth out of it. If in the process they took too much risk and failed, they could simply declare bankruptcy and wait for the government to bail them out. The traditional banking system really sucks!

Even if the total supply of a particular coin, let's say BTC, is fixed, anyone can still create altcoins derived from BTC. You know there is wBTC which advertised 1:1 (*cough* like tether). In reality, no one can stop these coins and similar fractional reserve (FR) system to exist. Even your BTC on exchange is not secure from FR practice. So no, crypto won't eradicate FR in that sense.

But, the one that matters the most is FR by central banks. There's no escape from it. In bitcoin world, you can opt-out by not participate in buying wrapped tokens and always store your coins in your non-custodial wallet.

If the inflation gets out of control and we get a world with hyperinflation all over the place I would not be surprised if governments back their fiat currencies with a combination of gold, silver and bitcoin in order to try to appease people and control the inflation, this will be a last resource kind of thing because this is the last option central banks want to take, but after some time they will justify to print more money than whatever assets they have in reserve creating fiat currencies once again, and until people realize this sleight of hand by the governments and do something about it then they are going to keep using it.

Not necessarily.
It could be and it could not be, since it's working its balance internally and we don't have any information on this you can assume it to be either way, it's a matter of trust.

But in Salvador cases, I would actually suspect the opposite happening, with the government not actually liquidating coins and using a sort of $ fractional reserve to pump up the price, it would make total sense from their point of view since they would be stocking on BTC on debt fiat.


Yeah right in theory, in reality...

If enough people do things on-chain, then fractional reserve would obviously be eliminated.

Unfortunately it will continue to happen. A lot of projects that centralize things (e.g. Tether) tend to evolve into bank-style fractional reserves as a matter of time.

Make sure that your coins are on-chain at all times and you control the keys to your coin, and you will be good.

I like your appreciation about the Tether, basically that currency has been growing in terms of which many trust because they see it as if it were the USD, anyway there is also the BUSD, which is being well seen and is currently being taken into account for many uses in the BSC network and the different NFT games and for the exchange of coins or tokens of the games, if we think that this is a way to protect our money, would it be correct? I know that Tether was highly named by many who was responsible for the bullish trend of BTC in 2017, because there was a whole problem where Bitfinex was involved, but I still have a lot of trust in that stablecoin.

By having demurrage, X% of all coins go back to be mined each block, and at each block each wallet give back to be mined Y% of X% of all coins (rounded up always) where Y% is based at the percentage of the total coins the wallet have.

Maybe this would make harder for a company or bank to do fractional reserve stuff, because their wallet would have tons of coins and so have a huge percent of the total coins and so their value of Y will be big and they will lose tons of coins over time.

By losing tons of coins over time, they reduce the amount of real coins they have to give back to people. Fractional reserve banking usually works, because the amount of people wanting their money back is usually just a small percentage of the total real money they have, but with this demurrage idea as they continue to lose money this amount of people that want their money back at a given time will become a bigger and bigger percentage of the bank total real money.



This idea has just one problem, you now have demurrage, a thing that, like printing enought money to make sure price inflaiton has 100% chance to happen (the monetary inflation done by the state), is a HELLISH thing.

The whole premise behind fractional reserve is that banks aren't handing out real money or real coins when they approve loans or credit for their customers. They are handing out numbers on a spreadsheet only. This could work in bitcoin just fine if people don't actually withdraw their coins from the platform in to their own wallet, but rather just trust the number the platform shows them is present in their account, as they do with centralized exchanges, web wallets, and so on.

Indeed, forcing the bank or centralized service to sacrifice some of the coins they are holding with every block mined, actively encourages them to hold as little as possible in their reserves, making fractional reserve worse rather than better.

This of course all ignores the fact that you would never get consensus on a proposal to start stealing coins from people's wallets and adding them back in to block rewards.

The difference is that if you end up with all of your fiat with you, then some people would have to car thousands of dollars, some would even have to face with millions of dollars stored somewhere, you can't put that in your wallet in cash. Whereas in crypto we are talking about digital numbers, download a non-custodial wallet on your phone and pay with QR code if you want to and you are done, it is as easy as that to carry crypto.

Yet, we are still seeing billions of dollars deposited into exchanges, what happens if those exchanges started to use your money to do something with it? What if there are 2 billion dollars deposited but 1.5 billion dollars left because exchange lost half a million dollars trying to do something? As long as people do not withdraw all together, they will slowly make that back as profit and will eventually equal the deposited number again.

Yes, that's exactly my point(s). As I pointed out my first reply in this thread here (https://bitcointalk.org/index.php?topic=5372469.msg58496931#msg58496931), two major exchanges have already been caught red handed doing exactly this, and using customers' deposits without their knowledge or consent to invest and try to make themselves more profit. I would wager that many other big exchanges also do similar things, using their large bitcoin holdings to fund loans, investments, expansions, etc., and therefore leaving them not holding 100% of their customers' deposits. Since the only time everyone tries to withdraw their coins from an exchange en masse is when they already know that exchange is having major liquidity problems, by which time it is already too late for the users in question, then most exchanges doing this will get away with doing this just fine right up to that moment it becomes too late.

There really is no reason to leave you coins long term on an exchange or other centralized service, and you very well might find your coins aren't really there when you come to withdraw them.

I don't think that we can use the same thing with Bitcoins. Fractional reserve banking might be hard if we are just considering bitcoins, since at the end of the day we have to understand the fact that, bitcoins as a whole are volatile and lending through 3rd parties can cause initial owners to have probelms since they might have to sell instantly because of market fluctuations. How do they decide to do that then ?

Stock market, exchanges nothing predicted any pandemic, but we are living one and everything went very down which does mean that, even if the exchanges hold billions of dollars it would be nearly impossible to achieve stability due to the volatile nature.

Fractional reserve banking might only work for fiat. With Bitcoins it might be a disaster in making.

Just my thoughts~
P.S. but there are many exchanges which ask the bitcoin owners to lend their coins through them

Definitely, that's why I said it can only be possible if Bitcoin is valued on itself like by purchasing power or work hours which would make it more stable than when it is purely determined by speculation.
Fractional reserve is definitely not possible in the current structure of the Bitcoin ecosystem and might not actually be possible in the coming years as it's still a very maturing system.

It does not even perfectly work with fiat if you consider situations of inflation and hyper devaluation, it's just the current most efficient system.

They are giving I Owe You papers not numbers, this "I Owe You" paper MUST be paid if requested, the thing is that by losing money they because of demurrage, they lose the power of give people their "I Owe You" .
If you put 10kg of gold at someone hand and he give a 10kg gold IOU, if you go there with this paper and they give you back this 10KG IOU, they WILL give to give 10KG gold back to you.

Also, you wouldn't do it with already existing coins, and if wanted to be done with already existing coin you could do some fork of a existing coin you want to implement this feature at.

Sure, but they can simply count on the fact that only a small number of people ever actually request to withdraw real bitcoin, and an incredibly small number would ever request to do it at any one time. Hell, even if they just implemented a delay of 1 hour for withdrawals it would give them plenty of time to buy more bitcoin elsewhere and transfer it in to their own accounts to cover the withdrawals and continue running their fractional reserve system with very little reserves.

I would imagine you would have a very hard time convincing people to move away from bitcoin (or any other coin) and to a forked version which is exactly the same except you lose a portion of your holdings over time.

This can only happen in a centralized system like Cex. This is why we have Proof Of Key Day Celebration. A day where everyone withdraws their money from centralized exchanges to their private wallets to test how liquid are those exchanges, to ensure they haven't fleece customers fund or divert it for another purpose. Some Cex do plan schedule maintenance and even halt withdrawals of asset during these period, it means something is wrong with depositors fund.

Not a great idea in theory, and completely useless in practice.

In reality, very few people actually withdraw their coins from exchanges on this day, and so any exchange operating a fractional reserve system can still easily cover the withdrawals. Even if everyone did withdraw their coins, publicizing a day in advance that you are going to withdraw your coins gives the exchange plenty of time to buy or borrow more bitcoin temporarily to cover those withdrawals, and then go right back to their fractional reserve practices the very next day. And even although some exchanges suspend withdrawals or go in to temporary "maintenance" mode during this time, people completely ignore the fact that doing so is pretty much proof they are running a fractional reserve system, and continue to use those exchanges anyway.

Rather than promoting a single day when people should withdraw their coins from exchanges, we should instead promote the idea that you should never have coins on exchanges unless they are actively being traded. Deposit, trade, withdraw, over as short a time period as possible.

This would also not work (assuming other people still leave their money at exchanges), this because fractional reserve bank sort of create new money of thin air, inflating the currency, and so mess with even those without money at banks or exchanges.

Which brings us back full circle to the point I made in my first reply in this thread here:

As long as a significant proportion of users are happy to let third parties store their private keys and therefore have complete control over their coins, then there will always be the possibility that the third party is practicing fractional reserve banking, regardless of whatever kinds of checks, balances, or controls you put in place. The only way to prevent is for everyone to hold their own keys and their own coins.

Does fracional reserve banking alone, enought to cause with 100% certainty, price inflation?

Because if yes, just printing X coins per Y minutes and halving this reward after Z year/months (or premining and distributing like NXT), is not enought to make sure price inflation not happen with 100% certainty like it happens with the state.

Yes, but it is limited, at least according to my understanding.

A reserve ratio of 10% would multiply the money supply by a factor of 9. A reserve ratio of 1% would multiply the money supply by a factor of 99. With a fixed base money like Bitcoin, there will be inflation when the reserve ratio drops and deflation when it rises.

This source of inflation is limited because a lower reserve ratio increases a bank's risks of failure. A bank wants to stay in business, so it is motivated to keep its reserve ratio at a sustainable level, thus limiting it contribution to inflation due to FRB.

On the other hand, there are many factors that reduce these incentives, which is why we continue to see banks fail today. A government wanting to increase the money supply could potentially insure banks so that they could reduce their reserve ratio to dangerous levels.

Also, keep in mind that the multiplier is not completely determined by the reserve ratio. In the U.S., the minimum required reserve ratio is effectively 0 now, but the multiplier as measured by M1, M2, M3 ... vs. base money does not reflect that. Furthermore, if you assume that the portion of the bitcoin supply held by banks will much lower than that of fiat, the mutiplier will be even lower simply because there will be fewer bitcoins available for banks to loan.

Even before the Fed removed the reserve limit altogether, banks would frequently hold less than the minimum reserve ratio, and simply borrow from each other or borrow from the Fed to meet the requirements. Essentially, as long as the bank was willing to pay a fee (the interest on the borrowing), they could hold any amount in reserve they wished, and create and loan out any amount they wished. The fractional reserve requirement is a way for the Fed to influence liquidity and interest rates, and not a way for the Fed to place a limit on how much new money a bank is able to create and loan out.

It's not really clear how this would work with bitcoin. If everyone started trusting centralized third parties to hold their bitcoin, then these third parties will only be limited by the volume of withdrawals or transactions they have to process each day, which will always be a tiny fractional of the total amount being held. If they start conducting off-chain settlements with each other similar to how fiat banks do business with each other (for example, Coinbase and Binance keeping a running total of how much they owe each other without ever actually transacting any coins), then it just becomes farcical.

On a protocol level, there is little to nothing that we can do to prevent third parties or, particularly, banks from lending out the money you have voluntarily given them. Once you have transferred your coins to the bank's address, you have lost control over them, which means from now you have to trust the bank that it will return your bitcoins the moment you ask. The only "power" you probably will have is the ability to track the movement of funds from the bank's address to which you sent your money, but it hardly can be considered a real power. However, bitcoin banking and the ability of banks to run their business on fractional reserve will be highly limited by the same conditions as in the case of a free banking system, a system of competing private banks with no central bank to bail them out.

Yeah, completely meaningless. With centralized exchanges such as Coinbase, your deposit is swept to a central wallet, which is swept and split up several more times, and quickly becomes lost in a system deliberately designed to obfuscate things to any outsiders. No one outside of Coinbase actually knows how much bitcoin Coinbase are holding, and can only go on whatever Coinbase say. And even if Coinbase were completely open about their holdings, such knowledge is useless without knowledge of how much bitcoin they have attributed to all the various accounts, to compare the two and see if they are indeed operating fractional reserve. And again, the only people who can provide such information are the exchange themselves, and they are hardly going to be forthcoming with information which will incriminate themselves in such a way.

I have to say it doesn't make sense to run away from fiat and banks just to reach to crypto and use coinbase. They just get all of your money, make money from it, then give you what you owe without even having to pay you anything. At the very least, all those banks that we hate, has to give you some savings account interest rate in order to loan that back to someone else, so if they are getting 5% a year, you are getting 3% a year, and that 2% is their profit.

Comparing that to coinbase, they give you nothing, you hold your money there and in return you end up with absolutely nothing while they are making so much money with your crypto. Doesn't make sense, keeping it on your own wallet is the way to go for sure.