Could bitcoin IOUs replace actual bitcoins?

[Lorenzo]

After all, it happened to gold and silver. Could the same happen to Bitcoin too?

Gold and Bitcoin share many of the same characteristics. They're both scarce, fungible, divisible, and durable. Gold and silver were once used as currencies but later became superseded in this role by currencies which claimed to either represent or be backed by gold. This had many advantages. These paper currencies were much easier to store and transport in large amounts. Governments liked them because they could manipulate their supply which gave them far greater control over their countries' economies. Banks liked them because they could lend out their deposits indefinitely through fractional reserve banking. Eventually these currencies severed their ties to gold altogether and this is the situation that we have today.

Bitcoin is different in that unlike gold, it's very easy to store and transport in large amounts. However, Bitcoin is also very technical and prone to hacking. And once your bitcoins are gone, they're gone for good. The average person today would probably have great difficulty trying to use Bitcoin in its current form. They would need to implement far better security practices and also familiarize themselves with concepts that would almost certainly seem alien to them.

And that's the unfortunate reality. Despite constant news reports of hacking incidents and data breaches as well as the proliferation of new types of malware such as CryptoLocker, the average person living in 2015 still has very poor security practices. Every few months, I visit my parents who are in their fifties and each time I do so, I usually find that their laptop is full of malware and adware. If one of these programs happened to be a trojan which specifically targeted Bitcoin wallets, then any bitcoins owned by them would most likely be lost forever. This might not be such a huge deal for storing small amounts of BTC but it's definitely not acceptable for storing several hundred thousand dollars worth of it.

As anyone who has ever worked in either IT or computer repairs might understand, my parents are not alone. This is especially true for the older generation and those living in developing countries who might not have grown up with technology and the Internet. Given the choice between holding actual bitcoins and bitcoin IOUs issued by a large, established company, even I would say that they would be better off holding the IOUs.

And that's the problem, really. I suspect that all it takes for bitcoin IOUs to replace bitcoins is a large, established company announcing a service which claims to hold your bitcoins for you. This bitcoin "bank" might offer a great service and snazzy marketing to attract more users and have deep pockets funded by VC investors from Silicon Valley and Wall Street. It might also have the support of governments who would prefer to have their citizens use a currency that complies with existing laws and regulations and is linked to real-world identities. They might offer perks such as insured deposits, interest on their savings, air points/credit card miles, and instant no-confirmation off-chain transactions.

Given the choice between storing $400,000 (the average net worth of a US adult) worth of bitcoins on a desktop computer which could also get stolen, hacked, or experience a hard drive crash at any moment (and that's another point - most people don't make frequent backups of their data), or storing the same amount of money in the form of IOUs issued by a "bank" that employs professional security experts and has a branch in every major town and city in the US, I think I know which one most people will prefer.

What do you think? Do you think the possibility of bitcoin IOUs replacing bitcoins is real or is it not something that we need to worry about? And if it is a problem then what steps can we take to prevent a "fiat 2.0" from happening?

[tokeweed]

Ripple?

[Elwar]

I had considered this as a way of buying bitcoins with credit cards.

You go to the site, you buy your bitcoins with your credit card. But because a purchase can be reversed up to 180 days you would not actually get bitcoins, you would get a token that represents a bitcoin until it "matures" after 180 days. At that point actual bitcoins replace your token.

People could trade these tokens if they wanted to and would likely sell for less than their value before they mature.

Why would anyone do this? Bitcoin drops 20-30% in a few hours and you believe it will bounce back. You don't have any money on any exchange, you don't have any money in your bank account but you have a credit card with a high limit. You buy knowing that in 180 days you can sell those coins or use them at a higher value.

[Q7]

In a way that sounds similar like a bitcoin bank which will manage the security, transferring, payment including maintenance on your behalf. If your concern is about groups of people having little or poor knowledge about computer security, I think that would be the way to go about trying to overcome the problem.

[Phat Buzz Tart]

In a way that sounds similar like a bitcoin bank which will manage the security, transferring, payment including maintenance on your behalf. If your concern is about groups of people having little or poor knowledge about computer security, I think that would be the way to go about trying to overcome the problem.

Yeah something like that.
And before you know fractional reserve appears - once again - to make things "beautiful" 

[BitUsher]

This happens all the time with hot wallets or storing your bitcoins on exchanges.
Always a risk and concern.

[jonald_fyookball]

What makes sense to me is bitcoin banks can store your coins but every depositor has their own address they can watch.  
the funds are insured and you pay a small maintanence fee for the account.  This kind of system would
eliminate all the fractional reserve BS, and once one solid company provided it, nothing less would be
considered acceptable.  So that's where I think the future is.

Of course some people will want to store some or all of their own coins and that's fine too.  

[CIYAM]

What is needed is hardware that can be trusted (which no government is keen to support).

So far this has proven to be rather tricky as problems with things like the Trezor project have already been found (there is a topic about how Trezor can be hacked somewhere on this forum).

IMO most people *are* going to trust a bank or similar to hold their BTC for them because if they are insured then that would currently be the least risky way to protect your investment (the fractional reserve problem is another one that perhaps stems from this).

[byt411]

However, the implementation of this would be very difficult. This requires huge trust, since the central authority who is storing the coins isn't decentralized. However, if all the addresses containing the coins are publicized, it allows for a lot of transparency to make sure every IOU is backed up.

It is a very good idea, but the huge difficulty is at its implementation.

[NUFCrichard]

I think there probably will be fractional reserve banking in place with bitcoin, there is also leveraged trading with bitcoin now.
In a perfect world, there wouldn't be any more than the number of mined bitcoins available to spend, but it isn't a perfect world unfortunately.

[jbrnt]

Cash is a kind of IOU. When you accept IOU instead of the real thing, you will have the fractional reserve problem again. Bitcoin will be easier to use in the future. I think some sort of NFC bitcoin payment system will be available soon.

[jonald_fyookball]

Cash is a kind of IOU. When you accept IOU instead of the real thing, you will have the fractional reserve problem again. Bitcoin will be easier to use in the future. I think some sort of NFC bitcoin payment system will be available soon.

you're right.

until Bitcoin it wasnt possible to PREVENT fractional reserve, as how do you prove you have the real asset?
Now with bitcoin you can prevent it if desired.

[countryfree]

Nice business idea: convince 1,000 people to give you cash and you give them back BTC IOUs. After a while, you just disappear with the cash.

[itsAj]

This is the exact opposite of what Bitcoin is doing

[BitUsher]

With multisig and checklocktimeverify or the lightning network we could create temporary and verifiable IOU's where fractional reserve isn't possible.

[pisciolatzu]

Nice business idea: convince 1,000 people to give you cash and you give them back BTC IOUs. After a while, you just disappear with the cash.

This seems just like what a lot of exchanges did, and are maybe doing.

[TheButterZone]

[johnyj]

Is it really difficult to handling a string of two-hundred-fifty-six 0 and 1s?  Cast 3 dices 33 times then you have the most secure private key in the world

Currently the address calculation part is still tricky (without address you can not send bitcoin into that perfect key) , once there is a simple way to do that part, average people should be able to understand the whole process without rely on any third party services

[jjacob]

What makes sense to me is bitcoin banks can store your coins but every depositor has their own address they can watch.  
the funds are insured and you pay a small maintanence fee for the account.  This kind of system would
eliminate all the fractional reserve BS, and once one solid company provided it, nothing less would be
considered acceptable.  So that's where I think the future is.

Of course some people will want to store some or all of their own coins and that's fine too.  

If you have 2 similar banks / companies - one ready to pay interest on your deposits, and the other where you have to pay a fee to store your bitcoins, which would you prefer? The majority would choose to receive interest. Fractional Reserve banking can't be wished away that easily. 

[jonald_fyookball]

What makes sense to me is bitcoin banks can store your coins but every depositor has their own address they can watch.  
the funds are insured and you pay a small maintanence fee for the account.  This kind of system would
eliminate all the fractional reserve BS, and once one solid company provided it, nothing less would be
considered acceptable.  So that's where I think the future is.

Of course some people will want to store some or all of their own coins and that's fine too.  

If you have 2 similar banks / companies - one ready to pay interest on your deposits, and the other where you have to pay a fee to store your bitcoins, which would you prefer? The majority would choose to receive interest. Fractional Reserve banking can't be wished away that easily. 

good point but many will take the security of provable reserves.  then again, many will be happiest storing the private keys themselves.  at least fractional reserve isn't the only option anymore.