Wiki is actually not entirely correct in its explanation:

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

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

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

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

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

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

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

How will flexcoin use the Bitcoins? The FAQ does not give any information on this subject. What safeguards are there against flexcoin making bad investments and being unable to give deposits back? I am not accusing flexcoin of operating any scam - however, further information would be useful to understand how flexcoin operates.

EDIT THIS QUESTION HAS ALSO BEEN POSTED IN THREAD http://forum.bitcoin.org/index.php?topic=23733.0

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


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

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

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

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

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

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

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

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


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

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

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

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

This information is the exact information I asked with my post at June 26, 2011, 10:53:29 pm


and received the answer


So it is very inaccurate to state that I am painfully new to U.S. regulations. However, having now received an answer to my original question, and recieving an unequivocal answer to whether Camp BX is regulated solely by business regulations or by business and banking regulations, I retract my statement that "the information on Camp BX website under "Is my money safe" is simply not true".

If communication with government agencies like the Department of Banking and Finance has taken place, Camp BX/Bulbul Investments LLC would be in compliance with U.S. Code CHAPTER 18—BANK SERVICE COMPANIES § 1861

(2) the term “bank service company” means:

(B) any limited liability company—
(i) which is organized to perform services authorized by this chapter; and
(ii) all of the members of which are 1 or more insured depository institutions.

(4) the term “depository institution” means, except when such term appears in connection with the term “insured depository institution”, an insured bank, financial institution subject to examination by the Director of the Office of Thrift Supervision or the National Credit Union Administration Board, or a financial institution the accounts or deposits of which are insured or guaranteed under State law and are eligible to be insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, or the National Credit Union Administration Board;

These provisions essentially state that a “limited liability company” “must be eligible to be insured by the FDIC” to obtain insurance. As Bulbul Investments LLC is not registered at the "Department of Banking & Finance" in Georgia, it is inconceivable that Bulbul is eligible to participate in FDIC insurance, or in compliance with State of Georgia - Department of Banking and Finance regulations.

Grant asked on June 22, 2011, 05:17:30 pm in thread Camp BX Platform in Beta: Margin Trading, Short Selling, and Advanced Orders (http://forum.bitcoin.org/index.php?topic=20777.0;all)

“So, basically if i deposit upto $250,000 to your exchange and you become insolvent (for whatever reason that could be) i am guaranteed my deposit by your government ?

Can you point me to some documents that proof your registration ? (might be i overlooked it, but i looked through your site and couldn't find anything)”

Whereas elggwf asked on June 23, 2011, 12:35:26 am in the same thread

“What do you mean by you're "FDIC insured" - did you get the FDIC to insure all your USD holdings? What about the BTC holdings, will those be insured too?”

and neither Grant nor elggwf received an answer; so I will make a very clear statement: the information on Camp BX website under "Is my money safe" is simply not true, which also applies to the information under “Legal compliance”:

“The foundation of our operations is an active and prominent compliance program, and we are committed to maintaining full compliance with State of Georgia - Department of Banking and Finance regulations.”

Camp BX might have an exchange that is far superior to Mtgox (of which I am not capable of making any judgement upon), but regarding providing accurate and relevant information in a timely manner, I fail to see any material difference.

Securites Investor Protection is not what my question relates to. Camp BX claims under section "Is my money safe" that all funds are maintained in FDIC-insured bank accounts. As Bulbul Investments LLC is not a "Bank" it cannot hold any funds for its registered users in FDIC-insured bank accounts, so the only remaining option, as I see it, for any funds to be covered by FDIC insurance would be in accordance with my previous entry; i.e. that funds deposited with Bulbul Investments LLC are insured in such bank accounts held by Bulbul, but do not afford any registered users safety in the event of Bulbul filing for bankruptcy, or any other event that negavtively affects assets held by Bulbul.

I have no idea how the previous post had many crossed over lines; i shall resubmit the entire post as I could not edit it successfully.

I must type parts of message again; will update soon.

“Try http://corp.sos.state.ga.us/corp/soskb/CSearch.asp

Keep in mind, other public records take time to update.

I think there is a misunderstanding about the role of FDIC in international customers.  FDIC insures bank accounts, not businesses.  Our accounts are insured by FDIC.

Hope this helps,
      Keyur”

Bulbul Investments LLC is registered as a Limited Liability Company, which affords "limited personal liability for the debts and actions of the LLC". Regarding FDIC, as you state, "FDIC insures bank accounts". I read this as the bank accounts that Bulbul Investments LLC hold are insured in the bank where the account of Bulbul is held. Despite funds held in accounts by Bulbul being insured, if Bulbul were to apply for bankruptcy, any deposits to Camp BX that are not in the account would not be redeemable due to the limited personal liability, and depositors to Camp BX are unsecured creditors - is this a correct understanding or not?

The Georgia Code - Corporations and Partnerships - Title 14, Section 14-11-201 states: "(a) A limited liability company may be formed under this chapter for any lawful purpose. If the purpose for which a limited liability company is formed makes it subject to a special provision of law, the limited liability company shall also comply with that provision."

As Bulbul Investments LLC operates an exchange market, I am under the impression that Bulbul is subject to other "special provision(s) of law", which again I am under the impression would require further licenses. Would you care to elucidate on this point? As Camp BX will potentially hold/transfer millions of USD, further information on the subject matter would allow for a better understanding of the risks involved when trading on Camp BX.

I transferred 500 Euro to Mtgox which literally arrived on the eve of the crash/hack. Of course the funds are not more than I can afford to lose, however the risk factor when trading on Bitcoin exchanges has been perfectly exposed (of course the risk factor always existed) and I am considering whether to withdraw completely as, with hindsight, I consider myself foolish to have transferred sums to an entity with a very unclear legal framwork, however novel and benign the concept of Bitcoins is.

The problem with the crossed over lines occured when I attempted to type "provision(s)" with [].

Bulbul Investments LLC is registered as a Limited Liability Company, which affords "limited personal liability for the debts and actions of the LLC". Regarding FDIC, as you state, "FDIC insures bank accounts". I read this as the bank accounts that Bulbul Investments LLC hold are insured in the bank where the account of Bulbul is held. Despite funds held in accounts by Bulbul being insured, if Bulbul were to apply for bankruptcy, any deposits to Camp BX that are not in the account would not be redeemable due to the limited personal liability, and depositors to Camp BX are unsecured creditors - is this a correct understanding or not?

The Georgia Code - Corporations and Partnerships - Title 14, Section 14-11-201 states: "(a) A limited liability company may be formed under this chapter for any lawful purpose. If the purpose for which a limited liability company is formed makes it subject to a special provision of law, the limited liability company shall also comply with that provision."

As Bulbul Investments LLC operates an exchange market, I am under the impression that Bulbul is subject to other special provision of law, which again I am under the impression would require further licenses. Would you care to elucidate on this point? As Camp BX will potentially hold/transfer millions of USD, further information on the subject matter would allow for a better understanding of the risks involved when trading on Camp BX.

I transferred 500 Euro to Mtgox which literally arrived on the eve of the crash/hack. Of course the funds are not more than I can afford to lose, however the risk factor when dealing on Bitcoin exchanges has been perfectly exposed (of course the risk factor always existed) and I am considering wehter to withdraw completely as, with hindsight, I consider myself foolish to have transferred funds to an entity with a very unclear legal framework, however novel and benign the concept of Bitcoins is.

A Camp BX search does still not generate any reccords at "Department of Banking & Finance" in Georgia http://dbf.georgia.gov or at "Georgia Business Licenses Directory" http://publicrecords.onlinesearches.com/Georgia-Business-Licenses.htm or at the FDIC "Bank find" http://www2.fdic.gov/idasp/main_bankfind.asp.

 
I'm sorry, but this "Legal compliance" statement does not contain any substance. Under what name is Camp BX registered in the State of Georgia? Camp BX is, as far as I can see, not registered. Likewise under which name are deposits insured with the FDIC. The "Camp BX user agreement" does contain more substance as it states that "This Agreement shall be governed by and construed in accordance with the laws applicable in the State of Georgia."

If Camp BX has a business model that acts in accordance with the law it can be envisaged that Bitcoin will grow as more businesses will accept Bitcoins.

Difficult choice; however as the thugs and murderers control the political and judicial systems in society, preference does not equal accomplishment. Effort can lead to accomplishment, although history tells us that effort is often hindered from leading to tangible and sustainable accomplishment, although history is oftentimes obfuscated.

Firstly, when you use quotes, make sure that the quote has actually been used; I never use "more stuff" in writing. Secondly, it ought be abundantly clear that I have altered my views on Bitcoins legal status several times, but only once have I used the term "absolutely positive"; the earlier post when I erronously regarded Bitcoins to be "securites" I explicitly stated that I was not positive.


i.e. Is there any value in the code; What is the code used for etc; this led me to believe that Bitcoins is a form of electronic currency. At this point I started searching laws on electronic currency. It is not apparent to me how you have appeared to come to the conclusion that the definitions "Internet scrip", "monetary value" and "money transmission" do not describe or are not relevant to the functions and mechanisms of Bitcoins; which is what the definitions do/are. Dwolla, Inc holds license nr: 2009-0049 as a Money Transmitter in the state of Iowa.

Due to the fact that the UNIFORM MONEY SERVICES ACT contains provisions that describe or are relevant to the functions and mechanisms of Bitcoins, and that it is not only my belief that Bitcoins perform functions of an electronic currency, it has allowed me to form an assertive opinion that when a law case is brought against Bitcoins, or when lawmakers decide to make specific regulations pertaining to Bitcoins, Bitcoins will be judged/infered to be an electronic currency.

The Constitution of the United States of America states:

"Section 8.

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;"

Following information is from Cornell University Law School:

"The U.S. Constitution, through the Commerce Clause, gives Congress exclusive power over trade activities between the states and with foreign countries.  Trade within a state is regulated exclusively by the states themselves.  As with any commercial activity, intrastate and interstate trade is often times indistinguishable."

http://topics.law.cornell.edu/wex/trade_regulation

But maybe there are sovereign nations where this maxim is not applicable. (rhetorical question)

When I'm absolutely positive/100% certain of something it would take compelling evidence to change my mind. Compelling evidence in this case would be an actual legislature enacting laws, or a court of law adjudicating, contrary to my current position. And I do not see that happening. So far you have not stated your position - how would you classify Bitcoins?

Although I am not claiming that the information contained here within would be applied to Bitcoin, it contains definitions and scopes which could, in at least some aspects, be applied to Bitcoins. The information also shows that Bitcoins is not operating in as much “uncharted waters” as at least I was under the impression. Of course Mtgox is not operating from the U.S. or the E.U. but other exchanges do. Other laws may apply in Japan, as the laws in the U.S. and E.U. differentiate very substantially regarding their applicability to Bitcoins.

Bitcoins are:

A; A code generated created through computational power.

B; A code traded against real dollars; it could thus be described as a form of electronic currency.

C; A code traded for services/goods; it thus performs functions of an electronic currency.

When lawmakers and/or the judicial branch enact laws/pass judgments they consider, amongst other things, the functions of the subject. It is thus likely that Bitcoins will be viewed as something capable of possessing value in an electronic form and something capable of being exchanged for services and goods.

In U.S. law the UNIFORM MONEY SERVICES ACT pertains to money transmissions, and although it puts in place statutory regulations against money laundering during the course of transmissions, money exchanges and check cashing, it contains some definitions that might be applied towards Bitcoins.

Electronic money is usually redeemable in cash, as with Dwolla for example. However this act includes a form of electronic money that is not redeemable in cash:

”Internet scrip

Stored value cards, token or notational systems as well as account-based systems may all involve exchange of value that is not redeemable in money. The term “scrip” has been used to refer to value that may be exchanged over the Internet but which may not be redeemable for money. Scrip is more analogous to coupons or bonus points that can be exchanged by a consumer for goods or services but have no cash redemption value. Scrip can be used by merchants to sell access to value-added web pages on a per-access basis or a subscription basis. They can also use scrip to provide promotional incentives to users. Scrip can represent any form of currency, points in a frequent user program, access rights, etc.”

 “Monetary value

The definition of “money” has been expanded to reflect the fact that certain payment service providers employ a form of value that is not directly redeemable in money, but nevertheless (1) serves as a medium of exchange and (2) places the customer at risk of the provider’s insolvency while the medium is outstanding. The same safety and soundness issues pertinent to redeemable forms of value apply to these irredeemable forms of value. Consequently, a new definition of “monetary value” has been included in this Act.”

Money transmission is defined as following:

“Money transmission subsumes several activities or functions: the transmission of funds as well as the sale or issuance of payment instruments and the sale or issuance of stored value. Stored value, as defined in this Act, is treated similarly to payment instruments, although some kinds of stored value are irredeemable in money. The grouping of funds transmission and the sale or issuance of payment instruments and stored value is consistent with existing state practice.”

Even the concept of mining could, hypothetically speaking, be addressed within the scope of the act:

“Stored value

Stored-value products are a recent innovation in payment systems technology. Stored-value products possess certain basic characteristics. According to the Federal Reserve, stored-value products share three attributes: “(1) [a] card or other device electronically stores or provides access to a specified amount of funds selected by the holder of the device and available for making payments to others; (2) the device is the only means of routine access to the funds; and (3) the issuer does not record the funds associated with the device as an account in the name of (or credited to) the holder.”

However, to comply with UNIFORM MONEY SERVICES ACT one must be licensed to transmit and issue “money”; Dwolla holds a license in Iowa, for example.

In the E.U. the definition of electronic money does not contain provisions where the electronic money is not redeemable by the issuer. The relevant E.U. Directive (Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending) states:

“The definition of electronic money should cover electronic money whether it is held on a payment device in the electronic money holder’s possession or stored remotely at a server and managed by the electronic money holder through a specific account for electronic money. That definition should be wide enough to avoid hampering technological innovation and to cover not only all the electronic money products available today in the market but also those products which could be developed in the future.”

“Issuance and redeemability
1. Member States shall ensure that electronic money issuers issue electronic money at par value on the receipt of funds.
2. Member States shall ensure that, upon request by the electronic money holder, electronic money issuers redeem, at any moment and at par value, the monetary value of the electronic money held.”

Thus, despite attempting not to hamper technological innovation, by setting the requirement of redemption of electronic money, at least Bitcoins is not considered electronic money in the E.U.

Regardless of whether or not above laws are applicable to Bitcoins or not, I am absolutely positive that Bitcoins will be deemed as an electronic currency, and if Bitcoins are successful and become more widely accepted and utilized as a payment in trade, the authorities in respective countries will either apply existing laws, or enact new laws.

UNIFORM MONEY SERVICES ACT
http://www.law.upenn.edu/bll/archives/ulc/moneyserv/umsa2004final.htm

Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32009L0110:EN:NOT

The process is not a strict platonic dialogue, however, I have attempted to obtain an answer. Yes, I have been wrong on several occasions, and the reason I retract previous arguements is because it has become obvious that they are not valid. My first post was: "The authorities in respective countires are the ones who will define whether BTC are regarded as a "currency" or a "commodity", it does not matter what other people associate BTC with." However, the legality question has provoked substantial interest from me.

I can state plainly that I am 100% certain that the unregulated trade with Bitcoins is definately not in accordance with the law. No trade is free from regulation (unless expressly stated otherwise according to law) so this maxim applies to Bitcoins. If it is possible to bring clarity to what law(s) that Britcoin is obliged to follow, it would be very interesting to obtain this information. I am not saying that just because it is not legal people will stop trading or that the authorities will undoubtedly be able to stop Bitcoins. I am an inquisitive person by nature who prefers to have knowledge aforehand than after the fait accompli. Also, if more people within the Bitcoin community became aware of the legal issues, a larger possibility exists that actions can be taken to prevent an outright ban. I currently hold a notion that legal awareness is not very high, whereas "programming skills" are high.

Due to human nature and the Goldman Sachs, Geithners, IRS's, Bilderbergers etc. who are at this moment gathering information (I sent a PM to Gavin saying that whatever he says at the CIA will make no difference, the powers that be are simply on a fact finding mission from multiple sources before they unilaterally decide on which action(s) to take) I am not the least hopeful that Bitcoin will survive, and that the primary threat stems from the legality point.

So I sincerely hope that you can see my point of view, and at least have an understanding of that I am not simply "trolling". The past days I was posting on other legal issues, force majuer etc. and the first post used an example from force majuer within construction work. Needless to say, I was semi-accused of trolling, but later I navigated to the London Stock Exchange and posted their "force majeur" definition - which was entirely different to MagiculTux definition, and was very mcuh aligned to the example taken from the field of construction work.

EDIT: I am not the least hopeful that Bitcoin will survive = thrive/develop from a state of usage by innovators/speculators to a wider commercially sound market

I disagree, this thread started off by discussing whether or not it was convenient to name Bitcoin as a currency or not. Some posters have engaged in a dialogue as to what the actual legal status of Bitcoin is. As it is unchartered terrirtories, and no authoritative answer exists or at least not easily accessible, such a dialogue will always proceed with a try and fail method. I am guessing you have never read any of Plato's dialogues?