Bitcoin Forum

Say BTC does become the currency that people rely on.  How would a loan system work?  I would imagine people would still need to take out loans for large purchases, such as cars and houses.

Without a credit system how does something like that play out?  Would credit cards in BTC exist, and you still received a credit score that allowed you to take out money for a house?  The fluctuation of the BTC price definitely makes it difficult for that model to work. 

I am all about Bitcoins, but I can't seem to wrap my head around this part of society that exists, and is still required with our current mentality.

Not sure if this is the right location for this, but I figured this would be a good place to start.

bitcoin is not the right currency for loans.

I don't know if another alt currency would work or not, but any bitcoin loans would have to take place outside the blockchain and be done by contract.

I don't want BTC to replace fiat anyway, but rather compliment it.

The price of housing is artificially high because of the whole credit industry.

Before mortgages, you'd have people building their own houses on land they claimed as their own. A homestead. So I think in an ideal world we'd go back to that sort of thing, or something completely new.

https://www.youtube.com/watch?v=Y4WmDoYJhnk (https://www.youtube.com/watch?v=Y4WmDoYJhnk)

I certainly don't want loans in bitcoin, unless they're non-interest loans - that's where the monetary oppression in the world comes from.

What is wrong with loans?

It isn't loans that got us (US) in trouble.   It was the unbridled emission of credit to unqualified borrowers.  In our current fractional reserve system, each loan creates more money.  Even the fractional reserve lending isn't what got us in trouble, although it was a contributing factor allowing additional leverage that we're still hiding and unwinding.

A bitcoin loan should include interest, which is just the risk adjusted time value of money.  The borrower would need to qualify and have a way to pay back the loan.  The inability for borrowers to pay back the loans, combined with the leverage added to the system, combined with the ratings agencies being co-opted by the banks to hide the risk is what led to the near-failure of our financial system.  I'm not convinced the problems have been solved.

What bitcoin brings to the table is a algorithmic check and balance which prevents fractional reserve banking.  You can't lend $10 for every $1 deposited.  You could lend 5 BTC for every 5 BTC saved and the incentive to do so would be an interest rate commensurate with the risk of the borrower defaulting.  If our banking system had run on a one-to-one ratio of depositors to borrowers, and proper credit checks, there wouldn't have been a problem.

I'm a proponent of Bitcoin precisely because the problems have not been solved, but rather cleverly papered over and hidden.

deflation is terrible for loans.  If you borrow 1 BTC and have to pay back 1.25 BTC (due to interest) plus the price of house goes down due to deflation.  You'll always be losing money.  Its only good for the lenders

Loans by definition must always lose money...

Lol

Anyway, if you're borrowing BTC, when the exchange rate settles, the interest rates will likely be lower than if the currency was constantly being inflated. It won't be 0%, but it will likely be quite low.

If Bitcoin becomes the currency that people depend on, then a credit industry will appear. It is probably safe to assume that Bitcoin cannot become mainstream with one.


There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.

It can't be done with bitcoin, because you cannot produce more bitcoins like you can dollar bills...And when the banks have to fufill the loan, they will have to send actual bitcoins to fund the loan....

The reason it was done with gold was because instead ofsending people actual bars of gold, they were sending them a bond that stated that they owned this much gold in return but were overselling the bonds compared to what they had in reserves....

I think same way than the loan system in the fiat world: a central autority that will borrow the bitcoins. You can also pay and give back the dollar equivalent of bitcoins, so one could avoid the fall in prices and etc.



There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.
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You will need to deliver the bitcoins.And you can't create bitcoins at your own will.

Would be the same as using gold as coin, instead of backing your coins with gold.

Loans do not always lose money, but when the price of the unit of measure goes up it hurts the borrower and helps the lender in terms of fiat.

Generally speaking it is not a good idea to borrow in bitcoin unless you plan on using your borrowed funds to pay for some income generating asset that will generate bitcoins.

Why would you lend money if you don't make money by doing it? You could just save the money in your wallet.

In order for it to make you money, someone has to pay. That person is the borrower.

Thus borrowing always loses money.

Maybe there's something worth that loss of money, thus making the loan worth it, but that doesn't change the fact that loans always lose money. Whether thats though high interest rates, or a combination of low interest rates and deflation, is irrelevant.

Perhaps the credit industry would turn into more of a private investment.

Eg. Someone would loan you 10BTC to start your business, and instead of interest on that loan (because interest cannot exist in a bitcoin system - fractional reserve impossible as stated above) they'd agree on a % of your profit, up to 150% of their original investment. Or whatever.

I think this is what's happening already with crypto 2.0 decentralized exchanges and asset issuance.

Personal loans need to stop anyway. If people can't afford to buy cars then no one will buy them and someone will eventually come to market with a cheaper car which everyone can afford. The current credit system just insures money flows to the top even when the poorest can't realistically afford what the big companies are selling.

The loan has interest on it but you expect the underlying asset (purchased by loan) to rise in value

Person A deposits 100 BTC. The bank A loans 90 BTC to person B.
Person B deposits 90 BTC. The bank B loans 81 BTC to person C.
Person C deposits 81 BTC. The bank C loans 72 BTC to person D.
Person D deposits 72 BTC. ...

Total apparent number of bitcoins in the system: 1000

That's classic fractional reserve banking and it works with dollars, bitcoins, gold, or seashells.

Yes, and BTC doesn't mean that nothing will ever appreciate against it . . :)

I think he's saying that the "apparent" number of BTC isn't the same as the "real" number of BTC because BTC isn't a claimcheck on something unprintable, but is itself unprintable. I.e, the fractional reserve isn't built into the currency itself. Sure, I can deposit 100 BTC and the bank loan 90 BTC of it out, but I can't spend that 100 BTC unless the 90 BTC is repaid, or unless someone else deposited another 90 BTC and I requested my withdraw before the bank could lend it out.

Putting it in terms of the terms on the fed's balancesheet...

"Currency in circulation" can't increase
however, you are correct in saying that M2 can increase.

Agreed - except perhaps with the caveat that when it all goes tits up (frb under BTC) and 100,000 x Jo Bloggs' default on their loans, the Govt. won't be able to prop up the banks that made those loans using QE. I guess taxation would still be an option - but would this be enough in the absence of QE ? I dunno.
   IOW - wreckless lending wouldn't be nearly so attractive when the safety net has been taken away.

Thank you for all of the replies. 

I agree with a lot of the sentiment that it would be great to not have loans, but I don't see how we could have a functioning society that is actually growing without some system similar to this.

The alternative in my opinion is complete shift in perception of society, and that isn't going to happen in our lifetimes.

I don't have a solution for this, but it was nice seeing others thoughts on this, which only confirms that there are a lot of unknown variables that still have to run their course.

I do love that this technology is actually bringing positive and constructive thought toward a better future.

This is also true with fiat banking. As long as people do not withdraw their funds in mass fractional reserves works great. When there are bank runs then depositors will stand to take losses, what prevents bank runs is deposit insurance that protects depositors in the event that a bank becomes insolvent.

There's an entire subsection here about loans, you can see how well it works out there.

Actually it isn't, at least not in the US System. Recall that the USD is backed by the "full faith and credit of the US Government."

Now visit this link:
http://fdic.gov/deposit/deposits/brochures/deposit_insurance_at_a_glance-english.html
"Deposits at ... insured banks ... [are] backed by the full faith and credit of the United States government."


In other words, deposits and the currency itself are backed by the same entity in the exact same manner, making them equivalent. Now I guess theoretically deposits greater than $250k or $500k in a single financial institution wouldn't have this quality, but to be honest, not many people have that much in a single account, people with that much money tend to have multiple accounts, and even if they did, the USG basically has set a precedent of never letting commercial banks fail for any reason, so the limit may as well not be there. They keep on increasing it anyway, the moment there's any sign of a bank coming close to failing.

I also think that any loans in bitcoin are risky. btc is a non-reversible currency by nature. If someone does not want to return the loan, what are you going to do?

Take their collateral

Gold isn't particularly reversible either, but there was a time when all loans were denominated in gold.

If someone were to be able to give up collateral in exchange for a loan then why would they need the loan in the first place?

WTF?

Because they want money but they don't want to give up their asset permanently, obviously? Because they want to buy something else? You know, the reason for any loan ever? Just with a limit equal to the borrowers total equity?

Moreover why would a person take A loan if he had money in his account to be reversed away in the case of non payment???

This. Collateral, trust rankings, timely payments, good interest rates. It's similar to how it works in real life. Loans are and will always be based on trust.

BTCjam.com has been doing loans in BTC for awhile where people can do peer to peer lending.   I have never tried it before, and I was just reading how someone made off with a bunch of investor money...but that is always the risk of lending...

It's the same sort of system as it is here, except BTCjam has a lot of "trust profile" rankings. Like they verify your income, and things like that. Here, we base it off of account trust and collateral.

Lending in btc and taking loan in btc are too risky.

1) Mostly scammers take loan in btc with no intention of paying it back.
2) Legitimate loan takes on too much risk on the volatility on bitcoin.

A BTCjam loan is a lot like a signature loan in that the only thing guaranteeing repayment is your signature. Like other signature loans lenders can get a judgment against the borrower if they do not repay the debt.

Loans on this forum are more like loans that use cash as collateral. There are very few if any lenders that will lend without collateral valued at 100%+ the amount of the loan. This provides people an disincentive to borrow as they could simply sell their collateral.

There are already websites giving interest for bitcoin and lending back the bitcoins, thus, using a fractional lending system.

That will be very common. But it won't resolve all the serious economic problems created by the deflanionary nature of bitcoin, if it becomes a main currency.

still its risky..

Person A deposits 100 BTC. The bank A loans 90 BTC to person B.
Person B deposits 90 BTC. The bank B loans 81 BTC to person C.
Person C deposits 81 BTC. The bank C loans 72 BTC to person D.
Person D deposits 72 BTC. ...

Total apparent number of bitcoins in the system: 1000

 This is a really dumb question, but can someone answer me nicely? I've always wondered this: Whenever people come to ask a loan, they are usually desperate. And people answer with "You need collateral, like some altcoin such as litecoin". Now what I don't get is, if the person is THAT desperate for money, why doesn't he just trade his litecoin for bitcoin at an exchange? It's reallllly easy and pretty fast. I just don't get why people ask for a loan with altcoin collateral when they can just sell those coins?

Maybe I'm overlooking something.

Loans for bitcoins wouldn't work very well, considering once something is sent, it is sent permanently. Unless bitcoin is accepted as a currency and regulated (which we don't want it regulated), then loans wouldn't really work out. At least without proper collateral. 

Loans can work without collateral, but in order for BTC loans to be enforced, there must be fiat still in use that can be seized by the courts to pay the creditor in the event the borrower defaults on his loan. It is obviously not possible to seize a borrower's bitcoin assets without his private keys.

i did heard about BTC loan, and there is escrow for it. I guess there will be some sorta btc loan company exists when btc becomes reli popular

You can seize all non-bitcoin assets. Not just fiat currency.

Well if you want there is a site Btcjam loaning, but you should lend your bitcoins to people that confirmed their identify.

People give about +0.5% so if you want to make $10 in 90 days after lending you should lend someone $2000 worth of BTC.

Its $2000 BTC risk for $10 in 90 days. Thats pretty awful since there can be a guy that comes back after 90 days and says that his plan didnt work out and he lost his btc.

Thing is BTCJam only does soft credit checking, it's not actually pulling regulated information to asses someone's risk when being loaned money. If BTCJam teamed up with someone like Experian who offer business services (http://www.experian.co.uk/business-services/business-services.html?intcmp=bs_cen_newbushometab_131205_1-b) they could reduce a lot of time spent checking IDs, get a more reliable credit score and they even include debt recovery.

The downside to this is that people will bad credit will never be able to get a loan, even if they really can afford to pay it back.

Also the BTC would have to be pegged to USD to avoid problems with fluctuation.

Thats the most important thing in loaning BTC. What would happen if you lend $30 worth BTC and after 90 days you get not $33, but instead you get $23.

When most people take out loans that are secured by collateral the collateral is something that is not liquid and something that is used on a regular basis, like a car for example.

The collateral used in BTC loans is liquid (can easily be converted into BTC otherwise it would not be accepted) and the collateral is not used by the borrower - it is generally held by escrow. In essence borrowers are giving up control of cash in exchange for different cash and they need to repay the lender plus interest.

There would be no reason why the borrower couldn't simply sell the collateral then repurchase when they would be able to repay the loan instead of borrowing and paying interest

I loan you $30 in BTC.
After 90 days you pay me $31 in BTC.

Obviously the lender would have been better off holding the coins and probably made more profit if the price had gone up but I think pegging the price to USD is more attractive as I don't think anyone wants to end up in a situation where they borrow say 10 BTC and suddenly the price increases by 10x leaving the borrower stuck.

btc jam is very similar to sites like prosper except that prosper will hire a collection agency for you while btcjam will make you collect yourself if the borrower doesn't pay

I looked into them and they are quite similar to the Prosper model. I made some money with Prosper but I am much more risk averse about my bit coin than I am about fiat currency.

Safello explores problems and possibilities with bitcoin P2P lending. https://blog.safello.com/index.php/2014/07/21/bitcoin-peer-peer-lending/

I am in the same boat as you. Another concern of mine is that most of my money that I made from Prosper was from loans made at the height of the financial crisis when interest rates were spiking even for credit worthy borrowers and the economy was in the tank, I was lucky that the economy recovered, allowing my borrowers to mostly pay back their high interest rate loans in full.

I lend btc on there . I have made a few loans and have been burned once. You can choose to borrow with btc pegged to US dollar or not. As a lender you determine if you want to lend to a pegged loan or not. Reputation loans are a quick turnaround. Some borrowers will do multiple rep builders. After 1-3 loans with a quick payback seem to be the safest for later loans.

Rep loans don't have any purpose other then to gain trust of the community and to make their risk profile look better. I argue that these kinds of loans are very unethical.

I think loans in BTC is very risky  :(
people can just get the BTC and run away
expect you know them in real life  :)


I think it's still risky

Reading what happened in the past in the loan section of the forum, I would never risk a loan with my precious bitcoins.
The probability to be scammed is high and the revenues are too little, I'll stay away from that business.

You need to require collateral to be safe lending BTC on the lending subforum. It is also generally safe to lend small amounts to users who have established accounts (full members or higher) with neutral trust as long as the amount lent is less then what can be made in a month at the lowest paying signature campaign for ~50-100 posts as your could get a trusted member to negative trust someone that defaults on a loan.

Incorrect.

If that were true we wouldn't have such an extreme increase in the money supply, national debt, and inflation. The way the Fed and banks in the US works is this:

Person A deposits 100. The bank then creates on book 900 to use for loans and credit=1000 Bam, money created out of thin air.

The banks do this for every deposit that is made, and new money is created "on book" for the additional 9/10s of the fractional reserve rule. This is what results in the highly compounding increase in the money supply. In reality, the actual physical money supply that exists couldn't even pay off the interest on the outstanding national debt.

From an accounting point of view, if they create 1000 loans for every 100 deposit, what is the liability corresponding to the loan of 1000 (which appears on the asset side)?

Banks can leverage their equity in a 10:1 ratio. For every $1 their customers have on deposit, a bank will have a liability of $1.00. For every $1 that the bank loans, the bank will have $1 in assets (before accounting for loan loss protection).

Both sides of balance sheet is expanded.   Read this article it explains more correctly than the posters here

http://www.cnbc.com/id/100497710

Aah... Thought so.
Many people have misunderstood the leveraging bit.

My explanation is a simplification that doesn't include inter-bank lending and the details of the accounting. The result is the same.

Actually, it doesn't make much difference whether you borrow in a depreciating currency (fiat) or an appreciating one (Bitcoin). What really makes all the difference is the real interest you pay on a loan since in both cases you pay more later than you borrow today in inflation-deflation adjusted prices.

It really does matter. If you borrow in something other then the kind of income it will produce then you are going to have an exchange rate risk. This is true for all types of assets. For example if you borrow dollars so you can build/invest in something that will produce gold then you will risk that the price of gold in terms of dollars will fall. The same is true with bitcoin; if you borrow bitcoin for something that will produce dollars, you take the risk that bitcoin will rise in value in relation to dollars.

What you say is true, but this is not relevant to my post (well, and my post isn't strictly relevant to the post I replied either, but relevant to the inside posts). I was assuming (as per OP) that BTC had become "the currency that people rely on". From this point, my assertion stays correct, since it is assumed that people get income in bitcoins.

Bitcoins in my opinion is really not the right currency to be able to allow loans. I personally feel that trying anything like this with bitcoins could lead to a lot more ways to end up being scammed.

It is literally no different than cash with regards to loans. Sure theoretically someone could run off with Bitcoin... but, the same could be said for cash loans. It's all about credit scores. Someone with a $25,000 credit could refuse to repay, but over time they've proven that unlikely. The same will go for Bitcoin. No one is going to loan you 10,000 BTC anonymously, but if you stake your credit or collateral on it, they may.

Would a default on a bilateral BTC loan mess up a person's credit score?
If not, then a person with a good credit score might also refuse to pay...

I don't know how credit scores work, so it may or may not work that way right now, although I think it does as long as it's done right, but presumably in the future it will for sure assuming Bitcoin becomes more mainstream.

Keep in mind that there is also civil liability involved. As long as a person's real identity is tied to a loan, and the loan is large enough to be worth it, they could be taken to court if they refuse to pay. Even if they refuse to pay or declare bankruptcy I'm pretty sure either one of those actions would (severely) harm their credit score.

This is very true because it is impossible to force someone to repay a loan using bitcoin. The closest thing you can do to forcefully recover your loaned bitcoin would be to get a judgment on the borrower (if you know his real identity) and have the courts seize his fiat assets and convert that fiat back into btc.

I cannot really agree with that.

Bitcoin is as good for loans as fiat. All you need is borrower identity and legal agreement.

I think this is a very big problem that will prevent the BTC lending economy from ever taking off. The fact that a lender essentially cannot force a borrower to repay his debt when he has the ability to do so will prevent the lender from wanting to lend in the first place and will cause interest rates to be higher then other potential sources of credit.

Why? It's money. BTC

You can walk away from a loan in fiat. Easy.

Lenders of fiat currency aren't protected from making bad investments by some sort of magic. They critique and analyze the data submitted by applicants for loans and verify their ID. This system would work for Bitcoin. It would work for any sort of cryptocurrency. It's just a payment method.

If a borrower was to walk away from paying a loan then the lender can sue the borrower for payment and if they win a judgment against the borrower then the lender can seize a borrower's assets. It is not possible to seize someone's bitcoin if they hold/control the private keys.

But it is still possible to put this person in jail, right? So it seems not much different from loans in fiat as long as you can reach the borrower.

This is very interesting question to discuss now that I've read this thread I also wonder how will it works in the future.

The penalty for not paying a debt is not jail. Loans are a civil matter, not criminal. As long as you did not willfully deceive the lender when you took out the loan (for example by forging income documents) then you will have zero chance of jail if you don't pay a loan.

That's true, but then again if your only assets are Bitcoins, then 1) you probably can't get a large loan to begin with and 2) what's the point? Are you going to sell everything you own for Bitcoin and know that you can never buy a house or a car because of your outstanding debt?

This was a metaphor. You can always make someone's life unbearable even without throwing them into a prison cell. ;)

I guess the problem is trust with BTC as well as controlability.
Since everything is so anonymous it's hard to force someone to do something.
This is also why scams happen more with BTC then with most / any other currency.

For example: with Paypal you can dispute a transaction, with bitcoin you can't.
This way I lost 0.17 BTC myself when trying to exchange it to Paypal

You likely never heard what Paypal is notorious for (hint: there is a thread on this forum about it, just search). ;)

Even this would be very difficult to do with the anon nature of bitcoin. People can and do easily use VPNs and socks5 proxies to hide their true identity and most people now are not willing to "show" their ID when taking out a loan (if they do show their ID it is likely to someone else). If you were to make someone's life hell then it would likely be for the wrong persona and regardless of it is for the right person or not you would likely be breaking debt collection laws which you can get in more trouble for then it is worth (read potential 6 figure fines due to the borrower).

This is a very big reason why it is not safe to use paypal period. But it is especially not safe to use paypal with bitcoin. Not only is it possible to have a PP transaction reversed if you are dealing with the legit owner of the account, but paypal accounts are notorious for getting hacked and when they do, whoever money was sent to by these stolen paypal accounts would be on the hook for the money that was sent them.

in some areas the price of housing isn't very much at all. in places like cleveland, buffalo, chicago, you can get like a 4bed 2bath house for $30k. but then in boston the same house is 2.3 million  :D

I think it is possible that loans could work on a contract basis where identification is required to be confirmed. Only way to make it work but there is still the problem of fake ids. Loans have no backing in any real organization. A loan of 1 btc could change over time (ex. Its 600 when given, 500 when its due) in value.

BTC loans will be successful for big orders if the final amount to be paid is in BTC[not dollars] since for big amounts slight variation in market value can cause big profit/loss.

There are companies that gives out loan in BTC, try btcjam.com

I could hardly fancy anyone making a loan to an anonymous entity, whether it be in bitcoin or in fiat. Regarding making a debtor's life a hell, I didn't actually mean anything illegal. Sorry if I wasn't clear about that from the start. My point was that failing to repay the loan could entail such consequences that would make taking a loan with the purpose of not returning it an unwise decision.

The FDCPA allows for a debter to simply send a written request for the lender to cease communication and once this is received, further communication (with few exceptions) is allowed. In order to recover anything further the lender would likely need to pursue legal action which is very expensive, and even then they will only recover payment if there are assets to be recovered.

Yeah but what if a person wants to start a business and what not and has no spare BTC? How can an economy work without loans? Of course, that is if it doesnt replace FIAT which I think its impossible.

Correct. Fiat cannot be replaced completely.
At least, not until taxes have to be paid in fiat. :)

So it doesn't make much difference whether you loan in bitcoin or in fiat, correct? Also FDCPA (don't even know what it stands for) requirements are only valid for one country. Other countries may have other regulating bodies apparently with different requirements.

If FIAT doesnt exist how is people suposed to do business without loans?

The FDCPA is the Fair Debt Collection Practices Act. Generally speaking fiat based loans will have more options to guarantee payment. Even signature loans for example will require a borrower to have an active checking account that money can be automatically withdrawn.

Fiat based loans also generally will require more documentation regarding a borrower's ability to repay their loans. Yes this is not something that BTC based lenders cannot do but the economy is generally not setup to do this.

Once licences come into play, I can see documentation for bitcoin users getting more cumbersome than fiat documentation.  ;D

With fiat, bank loans create money out of thin air increasing the money supply thus promoting inflation. Nowadays the banks can free wheel as there is little to no requirement to hold reserves. BTC is different because lending BTC is real. None created from the loan.

Imo modern economy can live without loans and loans in Bitcoins will help current banking system to stay alive. It's not we are want, am I right?

I really don't think you need any licenses in order to lend either BTC or fiat. You just need to be sure to comply with anti-discrimination laws when lending to people.

I think the biggest challenge that lenders will have is lending to people who are potentially in another country. Having a loan agreement cross boarders is not an easy task and would likely be very expensive and difficult to enforce.

Just like with gold in the 19th century, BTC banks would "create" BTC bank notes (receipts) with all ensuing consequences like bank runs and bank defaults.

How do you "lend" BTC? Once the transaction is done, the other person owns the BTC.

Yes. The other person has to repay you.

I don't think licenses will so much have to do with the expenses of lending in BTC. I think it is mostly the fact that once you give someone BTC it is very difficult to force them to give it back (repay their loan).

If loans are given prudently then this would likely not happen. I also do not know of any banks that deal in BTC that are doing this. The possibly exception to this would be bitfinex woh recently saw larger then the rest of the market drops in their prices, likely due to margin related issues (loaning BTC out in order for traders to buy more BTC). 

If a person has 1 BTC in their Coinbase account and Coinbase lends 0.9 of it, then there is effectively 1.9 BTC. Money has been created. That's classic fractional reserve banking. No banknotes are needed.

Actually only .9 would have been created. Coinbase would still be at risk as if too many people wanted to withdraw their money but didn't have enough reserves to cover the withdrawal requests.

Licences increase cost. Compliance officials are one of the most expensive hires in the market.

I got amazed at first when i saw the Btc loans section in here don't know how its works but I am sure it's not a newbie thing

This is true, however lenders would likely not need additional licenses above what traditional fiat banks have.

It would have been nice to see how the markets evolved if there were no licences/regulation. Governments are trying to currently force fit regulations applicable to a fiat economy on to crypto as well.

A small amount of regulation is generally healthy as there are many people that are very gullible, as well as the fact that it if often difficult to do due diligence if there is zero accountability on the other person's end for manipulating facts. What the kind of regulations we are seeing in some states that cap the interest rates that borrowers can be charged is causing is the least credit worthy borrowers be shunned from the credit market because it is illegal to charge them an interest rate that is appropriate for their credit/risk profile.

Right. Even will full due diligence, there is still possible for scammer to scam, the reason government and court need to exist in the first place to enforce the contract and agreement between two parties.

If I'm not mistaken, the proper name for this process is "money multiplication". FRB refers more to a reservation of some part of the deposit in the process to avoid bank (wallet, lol) runs, and, strictly speaking, is not required for the creation of money thereby (especially for a system with a Central Bank).

I don't think the courts are so much necessary to catch scammers (although they are to some extent) but rather the government to set limits as to what lenders can charge and to set certain disclosure guidelines. If all of the relevant facts are properly disclosed then it is much more difficult for one party to get a much worse deal then the other party to a transaction.

Given the non refounable nature of btc, isnt it kinda tricky'?

Smart contracts will show the way going forward.
No room for subjective interpretation. No room for protracted litigation. :)

So how is it suspossed to work? how would one get a btc loan and regulate the whole thing?

There are very few real world applications that smart contracts can be implemented in. If a computer/blockchain can "read" a term of a contract then it can be just as easily read by the court system so there would be little to no room for dispute. The issue with most contracts is that the terms and/or subsequent performance by one or more parties to a contract is less then clear. 

Most contracts have something that is open to interpretation. Also the US constitution guarantees due process so a "smart" contract would likely be ruled invalid by the courts unless it can be looked at by the courts.

it's a reckless idea but in my opinion, a loan by BTC will be very difficult to make and it also bring many troubles later.  :) :)

Well, if it is automatic (say calculated and executed on ethereum), how would the courts intervene?
Let us say, I execute a smart contract with another person, so that bitcoins from an escrowed account go into 1 of 2 addresses depending on the outcome of an event. This is executed using ethereum (when it does come up). My opponent doesn't know my identity. I would love to see the courts try and invalidate this contract.

You could sue the ethereum to prevent the money from being disbursed prior to having the dispute settled. You could file a lawsuit against a "john doe" who is the counter party to your contract and if they do not respond to your lawsuit then you would win by default. This is simply how the court system works, it is designed to settle disputes in contracts.