Bitcoin Forum

Lets say you are a bank and the world runs on BTC.

Could you loan out money? Could you even operate?

I'm thinking "no". Everyone would essentially hold their own wallet which they would use even if they had a little in a bank for spending.

This basically means all banks would at all times face a "bank run"-scenario.

Pause for a moment and consider the vastness of this; not only could BTC kill off MasterCard, Visa, WU and Paypal - it could kill off ALL banks.

Since BTC makes money very "real" and finite it is either spent or not spent. The closest to a bank you could run would be an investment firm.

You would have to provide yields above the rate of BTC deflation (I'm guessing 2-6% akin to gold after the adoption period) though.

You could also loan money against collateral - however you could only do so ONCE. Money is no longer just circling around bank databases so you can't loan out the same money 5-10 times as is done today.

However all core bank functions; card payment, ATMs, accounts and transfers would become irrelevant with BTC:

Selfish clients at retailers accept pure BTC cards, ATMs are not necessary as BTC payments can be made even with simple phones, wallets are the new accounts and transfers are as easy and cheap as email.


I'm sure the free market will still make mistakes, but in a BTC future they might well be smaller and much less catastrophic than today.

Obviously along with the anonymity this means BTC could change the entire world structure and I don't think many people fully realize this.
What are your thoughts on this hypothesis?


If I am right and bitcoin does not fail somehow - what will happen when the big banks discover this? Death penalties for any merchants revealed to be accepting BTC?

Will the most productive parts of the economy be using BTC slowly leaving the US, Greece and such behind?

I'm thinking only partially here, it cannot be denied that these places have workforce and natural resources and that BTC trade could to some extent be suppressed locally.

On the other hand it would be easy to hide on the internet even in the US and convert $ to BTC and back - essentially leading to de facto mass abandonment of the $ and thus rapid $ inflation as the market realizes no one wants to hold it and that everyone has the means to achieve just that.

I don't think Bitcoin could kill off banks totally.  Holding all your funds on your hard-drive is not safe due to malware, viruses, hackers, hard-drive errors and your hard-drive dying.  So there will always be a call for a central place's to store wealth.  Once these centres/banks have all these deposits they can lend it, invest it and so on.  So Bitcoin does not mean the end of banks or central reserves.

Related:

 - http://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin
 - http://bitcointalk.org/index.php?topic=22553.0
 - http://www.webisteme.com/blog/?p=192

Matthewh3:
There probably would be banks left, but I think they would become so rare there might as well not.

I think in time people will come to trust a backed up and highly encrypted file far more than the banks we have today.

I mean yes trojans exist, but where would you be most likely to loose your money today?

I am investing practically all my money in an industrial wind turbine right now, but when/if I have cash I might well put almost all of it in a BTC wallet.
Greece anyone?


Stephen Gornick:
Of course they can do fractional banking just as it has been done with gold for centuries - However unlike with GOLD, you don't NEED a bank with BTC.
Bitcoin security is easily better than that of many banks, you run no risk of default on your credit, tax grabbing, fees or account freezing.

Further as soon as merchants/workplaces take/pay BTC there will be no reason to even have an account for a credit card.

Why do you use a bank? Me:
1. Money storage (-> BTC wallet)
2. Money transfer (-> BTC transfer with NO fee)
3. Easy use credit card (-> future BTC cards/phone apps)

If using a bank does not give an advantage why should I trust them or even bother to open an account? I am a lazy person after all... and so are most!


Just imagine what will happen to the Swiss slush fund banks when the dictators of the world discover bitcoin and the virtues of a long password.

Banks won't disappear, although they certainly would be marginalised.

Yes, most people use banks for money storage, transfer and loans. However banks do provide much more, especially in terms of investment services / wealth management, stock trading etc (with my bank account I have access to almost everything financial from one provider, and also from one online interface). I don't see this disappearing if bitcoin becomes the standard.

Furthermore, I would prefer to have a bank account to keep most of my money safe in, since I trust a bank more in its capabilities of keeping my money/BTC safe than I trust myself (add to this the fact that you would probably be given interest when depositing BTC with a bank -- won't happen if you store your btc under the mattress). (Although it's only Swiss banks that I trust -- I wouldn't keep significant amounts in UK banks due to my previously poor experiences with them.) Finally -- even if I did store an encrypted or paper wallet -- I would probably place the physical item (paper/USB stick / etc.) in a safe -- which I can rent at the bank.

There are already Bitcoin banks now. Check out IBB and the lending section of this forum.

Banks as we know them should disappear, but physical exchange locations might still exist. There might be a need down the road to be able to easily convert bitcoins to physical currency like silver/gold.

BS!

Did publishing disappear after Gutenberg? 
To use Falkvinge's analogy: Did ice sales and cold storage end after refrigerators were invented? 
Are you saying bitcoin will kill flexcoin, blockchain.info, and mtgox?   


No, publishing technologies -help- publishers.  Mp3 has helped and will continue to help musicians.  And new financial technologies will help banks.

Sure, there will be some banks that fail because they don't embrace what people want fast enough but others will profit. 
Blockbuster has struggled but look at Netflix. 

New tools for finance and commerce will only give banks more business, not less!!!   

The only thing bitcoin tries to kill off is fraud via counterfeiting and other secret money creation. 

While some will be happy to keep paper wallets under their pillows others will want to use a bank. 

You can take that the bank. 

Banks and the CC companies do a lot of things, but let's talk about lending.

People want loans. They want them so much, they're willing to pay for the money they get, in the form of interest. This is true now, it's likely to be true in the future. Bitcoin won't change that.

Personally I'm skeptical very many will want to handle their own security vis-a-vis wallets, but even if I turn out to be wrong, all a bank needs to do to draw deposits is to offer sufficient interest on them. Even in the worst case (for the bank), they'd just need to offer higher interest on deposits than banks currently do, and correspondingly charge higher interests on loans, but that's not going to stop lending. As long as the returns on loans given out are greater than the costs of operating, lending is profitable.

If, in this scenario. the long-term situation remains such that interest rates stay high, the banks may have an incentive to hold significant reserves of their own money for lending  purposes, as this reduces the need for expensive (for the bank) deposits to finance lending. So, even if Bitcoin banking starts off small, and no established, large institutions enter the market, any long-term players in the lending business are likely to take as much of their profits as they can and hold it for lending to get a competitive edge in the form of the ability to lend at lower rates.

This is all pretty premature IMO. Bitcoin lending may spring up in a bigger way soon enough. Probably it's going to get quite ugly. There will be fractional reserve banking, but at first anyway, it's going to be wild west - style, with little to no assurance on the level of reserves actually held by lenders.

Yeah there is already a lending bank available, as was mentioned IBB, http://www.ib-bitcoin.com/

They're a dividend paying share on GLBSE.

With todays fiat system private banks can create money. This is not possible with bitcoin.
The total amount of bitcoin in the world is still controlled by the bitcoin network and outside of banks control.

Fractional reserve can still easily exist with bitcoin, but only if users allow it.

I would only deposit my money into my own account/address with the bank.
Then I could monitor what the bank did with the money. I'd either have an app on my own computer or
buy some monitoring service from a 3rd party.

I guess you could also have bitcoin scripts making it impossible for the bank to move your money without
your "signature". But then why not just do your own banking and have that safety key with a 3rd party service.

If you don't hate fractional reserve like I do, feel free to put your money in a bank without these safeguards.
But remember this is like investing in the stock market. Suddenly all your money can be gone.

+1

And a plug for Starfish BCB


Really?  I'd love to see them try that.

It's going to be really, really tricky to pull off lending in bitcoin on a large scale. Fractional reserve will be difficult if not impossible. Most deposits available to loan would have to be CD style deposits that can't be touched for some time. No FDIC or its equivalent will make people much more wary. Interest? Very hard to say. I personally would love to see a global-scale JAK style banking system emerge (http://en.wikipedia.org/wiki/JAK_Members_Bank). But, realistically, I think there will be little to no lending with bitcoin as long as it has to compete with devaluing fiat. It just makes so much more sense for the borrower to use fiat instead.

You might want to give a look here (https://bitcointalk.org/index.php?topic=64962.0).

The JAK system seems to be little more than thinly-disguised slight-of-hand. All they really did was force the interest paid/received to be in a different currency ("saving points") than the principle. It's still a form of interest.

You seem to be seeing the world out of the eyes of the average anglosaxon...

Having lived in Switzerland for a few years I can tell you that there are considerable groups of people who do not live on debt -- I know of only one person who has a loan there -- specifically a mortgage (house-ownership in Switzerland is uncommon -- most people rent, which means that mortgages are rare -- credit cards do exist but are mostly paid off monthly), most of the Swiss do not rely on the bank for a loan, instead they rely on the bank to keep their money safe, and less often to manage their investments.

There are certainly loans given out for businesses -- this is something I currently know too little about to compare.

Whether or not the above is a factor in the higher quality of life in Switzerland is certainly debatable.

What an odd viewpoint. Would you rather not pay interest on your mortgage in cost-free savings points or in cash? The savings points allows other people to borrow your money and then when you have enough you may borrow theirs. It encourages saving and it encourages an interest-free economy. How is that a bad thing? There is no necessity to create more currency. The JAK bank system is basically non-profit only charging membership dues to pay for a small staff. There is no sleight-of-hand going on here that I can see. Besides, how much interest do you earn on your checking account? 0.05%? How much is a mortgage rate, 3-6%? There is quite a discrepancy there.

Really?  I'd love to see them try that.
[/quote]
You've heard of the Federal Reserve haven't you?

You've heard of the Federal Reserve haven't you?
[/quote]

The quote was that "private" banks could make their own money.  Sure the Government of the country can inject additional printed currency into circulation via their version of a central bank.

So, when Chase or WellsFargo start printing and issuing, make sure you're in line and spend early.

Private banks do create their own money via collateral (mortgages, cars, etc.) and fractional reserve.

I really don't understand some libertarians' PoV on fractional reserve banking.

Bill deposits 20 Bitcoins with Jon. Bill has invested the coins in Jon, but clearly no longer has the coins. Only Jon has the coins.
Jon lends Josef 18 coins, reserving 10% (this is the fractional reserve part) to pay those who may want to withdraw their funds.
No coins are created. If anything, due to reserve requirements, coins have essentially been destroyed as they must sit around doing nothing.

Josef has 18 coins, Jon has 2 coins, Bill has no coins.

No.

Really cool explanation plus as wrong as it is short. ;D

Own money in this context does not refer to money printed by private banks, but money being made out of other peoples debts recursively.

lol - I was waiting for something like that.  Go back to the original quote which I was commenting on, which was the notion that banks (or a private entity) could simply create of money.  The recursive argument breaks down quite quickly as in a closed system there is no addition to the total.

I loan to you, you pay me back that and a bit = simply a transfer.

Bill deposits 20 dollars with Bank of America. Bank of American now loans out $18. Joe deposits $18 at BoB. BoB loans out $16.20, and so on.

That is one side of the ledger.  Now add up the liabilities to match the assets and you find they match. 


Stopping at an arbitrary point (7 deposits and seven loans)
Going out = Loans of 18, 16.20, 14.58, 13.12, 11.81, 10.63, 9.57 = 93.91
Deposits coming in 20,18, 16.20, 14.58, 13.12, 11.81, 10.63 = 104.34
Net position = 10.43 (i.e. the reserve which balances it up with the last loan of 9.57 to get the original 20)

That's even assuming Joe would deposit at BoB. Fractional reserve banking (which is a government regulation, not some scheme made up by banks to create more money) lowers profit margins in loan arbitrage, which is the only reason multiple transactions would occur.

Joe deposits $20 @ BAC. BAC pays Joe .5% APR in interest and pays the equivalent of 3.5% APR for overhead in rendering services to Joe like checking, online banking, ATM cards, etc. BAC then effectively pays $.80 to keep $20 for a year. BAC needs to keep $2 in reserves due to reserve requirements, meaning they only get $18 to make more than $.80 on. To make a profit, BAC needs to lend that $18 @ >4.5%, so let's say they lend to Joe @ 8% APR. Will Joe deposit that money at a bank? No, he'd be losing money as the bank only pays ~.5% APR in interest. Joe really needs to invest that money in a productive venture at that point in most typical scenarios, and BAC doesn't keep the $18 they loan out, it goes to Joe. There's no money being created, and no reason to keep re-lending to other banks for purpose other than arbitrage (which can't just keep happening forever) -- reserve requirements take money OUT of circulation, not put "out of thin air" money into circulation.

The problem is the conflation of "demand accounts" (e.g. checking), where the depositor is led to expect that the money deposited with the bank will be available for immediate use on request, and "time accounts" (e.g. CDs), where withdrawal before the maturity date is subject to the bank's discretion. Savings accounts fall somewhere in between, but on the whole are closer to checking accounts than CDs.

With a time deposit you are explicitly making a loan to the bank, accepting the temporary loss of use and risk of default in exchange for interest. Few libertarians seem to have a problem with this arrangement. The problem is with interest-bearing demand accounts, where the depositor has a reasonable expectation that the deposits are really his/hers, not the bank's, and yet the only way the account can earn interest (profitably) is for the bank to lend the money out to others.

It's true that Jon and Josef control the coins, and Bill does not; however, it is not clear that Bill really intended to invest the coins (and risk illiquidity and default) rather than merely deposit them for safe-keeping, whatever the bank's fine print may say. Based on Bill's understanding of the arrangement, he still owns the original 20 coins. When he considers the amount he is willing to spend, he is going to base that on having 20 coins, not just the two held in reserve. There may only be 20 real coins, but when you add up what people believe they have, you find that economic calculation is based on there being 28--right up until Bill tries to withdraw his 20 coins and finds he really only has two.

The difference between the written terms permitting the bank to refuse withdrawal for lack of reserves and the common understanding that one's money in a checking or savings account is available on demand can arguably be considered a case for fraud on the part of the bank, though there is certainly blame enough to go around.

Anyway, that's the argument as I understand it. I'm more of a free-banker myself, though I do feel that a low reserve ratio would be impractical given free competition in banking; any bank with lower-than-average reserves for its demand accounts would be the subject of targeted bank runs initiated by its competitors.

The savings points aren't free; they're the payment (i.e. interest) you receive for leaving your savings on deposit. Because they're restricted to buying and selling loans, they're disconnected from the rest of the economy, which limits their usefulness as a measure of the time demand for money relative to other goods. The requirement that interest on loans can only be paid in the form of non-transferable points received from previous deposits unnecessarily limits access to currency where and when it is needed.

Encouraging (over)saving and "an interest-free economy" are not positive outcomes. Interest plays a vital role in regulating the balance between present and future consumption. Eliminating it (which the JAK system does not do, despite the claims) would be tantamount to saying that there is no reason to ever save; if money saved is of equal or lesser worth as money spent, you might as well spend the money now and receive instant gratification. Incentivising (over)saving errs the opposite way; there is a balance point where the sum of present value from immediate consumption and present expected value from future consumption is maximized. Deviating from this balance by over-saving is just as bad in terms of wealth/quality-of-life as deviating through over-consumption.

Neither is it necessary to create more currency to pay interest in the same currency as the principal. Once you've paid the principal back, that money reenters circulation and thus becomes available to pay the interest.

The slight-of-hand is in the pretense that their customers are not receiving interest on their deposits, nor paying interest to take out loans. The interest may be in the form of "savings points" rather than a more marketable currency, but it is no less real for that.

I'll admit the "limits their usefulness" part is a bit over my head, however though the points are non-transferable inasmuch as they can't be converted to cash directly, the points are transferable to other people, and presumably this could be done for a price. Also, on a community level, I remember reading that points have been donated for local improvement projects.


I guess the main point is that it isn't banks siphoning interest off the economy, but rather the community mutually benefiting. There is nothing that necessarily incentivizes over-saving. I'm not going to save more points than I need to buy a house or a car, for example. People who are not good at saving money still aren't going to get many points. And these are the people that are most likely to default anyway.


There is nothing that forces a bank to put that interest back into circulation other than to earn interest on the interest. Instead of the community benefiting, the banker benefits. Bankers have been manipulating currency for hundreds of years now, and constricting supply has been used many times to snatch up wealth.


But you conveniently left off the point I made where checking accounts make 0.05% or less whereas mortgages are 3-6% or more, with any other kind of loan being even higher still.

Thanks for writing that. I've been struggling with that problem for a while -- how explicit should I make it that I'd simply be unable to cover large early withdrawals. Talked with Meni about it. Explicitly defining maximum withdrawals per day seems like a solution which is up-front, honest, and solves the problem. With the trust issues involving Bitcoin businesses, I'm not sure we could get away with saying "we'll cover early CD withdrawals at our discretion."

I think of withdrawals working very similar to how ISP bandwidth works. "Under normal conditions" you should get advertised speed, and usually a bit better than advertised. However, if people were permitted truly unlimited bandwidth, there would be many short bursts "clogging" the network instead of slower, consistent speeds. Having better-than-necessary infrastructure allows customers to use the bandwidth they want when they want it, but the service has to be undersold, with the better-than-advertised bandwidth, in a sense, being wasted as a reserve/buffer. Then, of course, there's fraud in advertising higher speeds but often being unable to deliver due to inadequate infrastructure.


It'll be interesting to see how Bitcoin lending develops if the value picks up enough to attract major players who'd have no problem plunking down hundreds of thousands of USD to hire attorneys, offer services like "bitcoin debit (perhaps even credit!) cards," and have a large enough transaction volume to permit on-demand withdrawals they can almost always cover by simply keeping something like 10% of deposits in reserves. It would also be utterly alien to have competitors aggressive and hostile enough to try shoving out other financial institutions by trying to cause a bank run. I think the most "hostile" action taking place now is when someone covers a good-looking loan in full without offering to split it.  ;D

My mistake. I assumed the points would not be transferable because having an exchange rate between savings points and regular current goes even further toward undermining their argument that the loans are interest-free. How are you not being paid interest if you receive "savings points" for your deposit which you can turn around and sell for ordinary currency? That there is an extra step involved seems like a very minor technicality.

There is no rule that says you must go to a bank to get a loan. Credit unions are an example of a deposit and lending institution where the profits go back to the community (or at least the members).

Perhaps not. I was responding to the claim in the original comment that the JAK system would encourage saving, presumably above the level of saving which would occur in a more open system permitting normal interest.

It was the principal which was being put back into circulation, but no matter. Sure, there's nothing forcing banks to put currency they hold back into circulation, but there's also no point in keeping it unless they plan to use it eventually. So long as there remains some currency in circulation, it is possible to pay off the loan, even if total loans exceed total circulating currency.

They wouldn't be able to profitably constrict the supply if they hadn't been permitted to expand it many times over through semi-deceptive deposit and lending practices. That only works because they're effectively stealing from their depositors, regardless of whether you place that theft at the time when they loan out the deposits (anti-fractional-reserve) or when they inevitably default on their obligations during a later bank run (free banking).

I left it out because I didn't feel it made any difference to the argument. It's an aspect of the "banks are bad" issue, and has little to do with interest in general.

Still, some points regarding the spread between deposit interest and mortgage/credit card interest rates: Checking accounts are pure demand accounts, so any interest you're receiving has to be added to what you would otherwise be paying for the bank's services, which could easily be a couple of percent, particularly if you hold a low balance. Mortgages and other loans also have to factor in the possibility of default and other overhead on top of the plain time-preference interest rate, whereas money in checking and savings accounts is considered extremely "safe". (It doesn't matter how true that really is, so long as people believe it to be true.)

There is also the fact that if you're a large organization in need of some money these days, you ask the government for it, since they're handing it out practically for free. Ergo, there isn't much demand for private loans. Individuals have to go through intermediaries, who are naturally going to take their own cut.

But the technicality is that a) both you and the buyer benefit in that you earned money you otherwise would have not, and they will have to pay significantly less or they could just deposit that amount and get the loan from a JAK bank anyway (if you don't have many points you can use a bigger down payment and this is calculated into how many points you would make as if you saved that over the life of the loan) and b) it isn't a bank getting the money.


This is true, and I use a CU for my banking needs. I just really hate traditional banks. :)


But with collateral loans and fractional reserve, the interest is significantly more than any money the bank actually had to reserve for the principle. So for you to pay it back with circulating currency, that currency must be debt blah blah blah it's a wonderful cycle of guaranteed default.


All definitely true, and JAK is a community-based system and not so much a credit-based one, so it probably would not work on a large scale. I still found it very intriguing, but for now I'll stick to my local CU.

It's not true that the interest can only be paid back with debt, so long as some money remains in circulation. To illustrate, let's say that the community has 20 coins, which are deposited in accounts at the Low-Low Reserve Bank (LLRB). The LLRB then issues a loan of 500 coins to Josef at 50 coins total interest, leaving them with an initial reserve ratio of about 3.8% (20 real coins vs. accounts for 520).

Josef buys 100 coins' worth of raw materials from the community (Josef 400 - 550; community 120), and then turns around and sells the finished products for 120 coins (Josef 520 - 550; community 0), applying the difference toward his loan (Josef 500 - 530). The LLRB puts the 20 coins back in circulation, either as new loans, or by purchasing goods from the community (Josef 500 - 530; community 20). Josef buys another 100 coins' worth of raw material (Josef 400 - 530; community 120), sells more finished products for 120 (Josef 520 - 530; community 0), and pays off another 20 coins of his loan with the proceeds (Josef 500 - 510). Repeat until the loan is paid off.

It is a theoretical possibility that the bank could make it impossible to pay off the loan by taking all the repaid coins out of circulation, but is that really any different from the much more common case where you are forced to default because you misjudged your operating costs or the effective demand for your product?

This holds true for bitcoins but not for fiat money in the hands of banks.

Correct so far, but fiat money in the hands of banks is anything but a closed system.

A "theoretical possibility"? Is this not the root of recession? Regardless of what starts a panic, banks bear down and get stingy. This makes defaulting so much more likely, which means the banks take possession of all your stuff. They win either way. Then things can snowball unless someone (JP Morgan/central bank) intervenes. Interest+fractional reserve+debt-based money is a really nasty combination. And with the recent housing crisis, the world has basically said go ahead and keep doing this, we will make sure the middle and poor pay for it. I don't think I could even imagine how different the world would be today if governments simply paid employees and contractors in debt-free money. Would there even be such a thing as the business cycle? Would recession ever be a word used in regards to economics?

It's "theoretical" in that it would be hard to make it truly impossible to pay off the loan by taking all the money out of circulation. The original comment implied that the mere existence of a loan where the interest exceeded the reserves would inevitably result in "guaranteed default". Clearly that is not the case, so long as some of the money keeps circulating. Equally obviously, the less effective demand there is for your product (whether because the bank is being "stingy", because others are simply hoarding their cash, or because they're spending it on other things) the harder it is going to be to pay off the loan, and the more likely you will be to end up in default. You can end up in that situation without any fractional reserves. It is possible to insure your business or set up a limited-liability company to ensure that you won't lose "all your stuff" in the event of default.

I'm not trying to say that fractional-reserve banking is a good thing. I may side with the free-bankers, but I still think full reserves for demand accounts are a good idea (and more likely absent central banks, federally-mandated deposit insurance, and federal bailouts), and feel that loaning out demand deposits is at least a bit shady, even if permitted by the written terms of the account--which, in all fairness, the depositors should be aware of. Interest-bearing accounts are investments, with liquidity constraints and the potential to lose value, and should be advertised as such.

HOlding your bitcoin wallet doesn't have to be in an electronic format either.

Don't the banks hold all your money on hard drives right now?  They sure don't have your money in the vault with your name on it.  It's yours because their database says you have an account balance.

I don't think bitcoin will kill banks.  It just makes it so they aren't a requirement.  If bitcoin were to become a major world currency, I'm sure the security guys that run online banking would switch to protecting bitcoin wallets.