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Author Topic: Does Bitcoin Allow for Fractional Reserve Lending?  (Read 1089 times)
BitProdigy
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July 28, 2015, 05:59:16 AM
 #1

I am considering a scenario in which bitcoin is the only currency in use or becomes the world reserve currency. The scenario is mass adoption of bitcoin.

In such a scenario, is it possible for Fractional Reserve Lending to exist? Historically FRL began when banks started lending more gold certificates than they actually held in gold in their vaults. Today banks can take the money deposited by their customers and lend out up to 99% of it to other people or gamble it in the stock market.

If bitcoin were the only currency in use, I don't see how lenders could ever lend out more than they actually held in reserve. I don't think it would be possible unless they had "bitcoin certificates" they were lending out or something, but why would people accept these?? So the question i guess is: If bitcoin is adopted, does that put an end to Fractional Reserve Lending?

I certainly hope so.  Grin

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July 28, 2015, 06:09:56 AM
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There is no fractional reserve lending, theres only a limit on whats being produced since its hard coded.

21 mill is the limit and thats including lost, and stolen bitcoin as well. As for the fractional reserve scenario that only happens if the mass of bitcoin was under one "holder" like a bank.

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July 28, 2015, 07:15:42 AM
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Fractional reserve banking is likely to become a part of the bitcoin economy, but perhaps to a lesser degree than the dollar.

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July 28, 2015, 07:22:24 AM
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Fractional reserve banking is likely to become a part of the bitcoin economy, but perhaps to a lesser degree than the dollar.

What I fail to understand is how this could even be possible to happen with bitcoin. Can you explain??

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July 28, 2015, 07:51:08 AM
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Fractional reserve banking is likely to become a part of the bitcoin economy, but perhaps to a lesser degree than the dollar.
What I fail to understand is how this could even be possible to happen with bitcoin. Can you explain??

Here is the simplified explanation by example:

Person A deposits 1.000 BTC in bank A. Total bitcoins: 1.000
Bank A loans 0.900 BTC to person B who deposits it in bank B. Total bitcoins: 1.900 BTC
Bank B loans 0.810 BTC to person C who deposits it in bank C. Total bitcoins: 2.710 BTC
Bank C loans 0.729 BTC to person D who deposits it in bank D. Total bitcoins: 3.439 BTC
Bank D loans 0.656 BTC to person E who deposits it in bank E.  Total bitcoins: 4.095 BTC
...

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July 28, 2015, 08:10:00 AM
 #6

Fractional reserve banking is likely to become a part of the bitcoin economy, but perhaps to a lesser degree than the dollar.
What I fail to understand is how this could even be possible to happen with bitcoin. Can you explain??

Here is the simplified explanation by example:

Person A deposits 1.000 BTC in bank A. Total bitcoins: 1.000
Bank A loans 0.900 BTC to person B who deposits it in bank B. Total bitcoins: 1.900 BTC
Bank B loans 0.810 BTC to person C who deposits it in bank C. Total bitcoins: 2.710 BTC
Bank C loans 0.729 BTC to person D who deposits it in bank D. Total bitcoins: 3.439 BTC
Bank D loans 0.656 BTC to person E who deposits it in bank E.  Total bitcoins: 4.095 BTC
...


Wouldn't that be more difficult since anybody can check their own address on the blockchain and that Bitcoin have a supply limit ?

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July 28, 2015, 08:12:04 AM
 #7

I am considering a scenario in which bitcoin is the only currency in use or becomes the world reserve currency. The scenario is mass adoption of bitcoin.

In such a scenario, is it possible for Fractional Reserve Lending to exist? Historically FRL began when banks started lending more gold certificates than they actually held in gold in their vaults. Today banks can take the money deposited by their customers and lend out up to 99% of it to other people or gamble it in the stock market.

If bitcoin were the only currency in use, I don't see how lenders could ever lend out more than they actually held in reserve. I don't think it would be possible unless they had "bitcoin certificates" they were lending out or something, but why would people accept these?? So the question i guess is: If bitcoin is adopted, does that put an end to Fractional Reserve Lending?

I certainly hope so.  Grin

In theory, NO.

Fractional reserve lending requires that there's an entity that can "create" more money by making loans out of thin air. That can't happen in Bitcoin...not without SEVERE risk to the lender and the account supporting the lender.

 One difference between bitcoin and traditional banks is Governments offer guarantees to savers with banks because they guarantee that their balance, to a certain amount, will be reimbursed if the bank goes bankrupt. This guarantee allows banks to lend out a majority of their balances on deposit to other people, which fuels the fractional reserve economy.

If bitcoin can't be guaranteed by some government it can't be in ANYONE's favor to offer lending if there isn't significant reputation to repay or collateral.

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July 28, 2015, 08:20:28 AM
 #8

Fractional reserve banking is likely to become a part of the bitcoin economy, but perhaps to a lesser degree than the dollar.
What I fail to understand is how this could even be possible to happen with bitcoin. Can you explain??

Here is the simplified explanation by example:

Person A deposits 1.000 BTC in bank A. Total bitcoins: 1.000
Bank A loans 0.900 BTC to person B who deposits it in bank B. Total bitcoins: 1.900 BTC
Bank B loans 0.810 BTC to person C who deposits it in bank C. Total bitcoins: 2.710 BTC
Bank C loans 0.729 BTC to person D who deposits it in bank D. Total bitcoins: 3.439 BTC
Bank D loans 0.656 BTC to person E who deposits it in bank E.  Total bitcoins: 4.095 BTC
...


Hahaha, this DOES NOT EXPLAIN IT. This, in fact, fails to explain it. When the bitcoin price drop because so much bitcoin is available and the same number of people want some, who's there to "guarantee" it's value? No one. The value disappears.

OR, better yet, when people realize that their loans can't be required to be repaid and they decide not to repay the lender loses and goes out of business, which also requires all lenders to flee in response.

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July 28, 2015, 08:42:42 AM
 #9

This can only happen if people do not store bitcoin at their own wallet. And there are reasons they don't want to do that: They are either handicapped in IT or prefer to rely on a third party to take care of their money

Exchanges typically practice FRB, all the bitcoins on exchanges are just numbers, the real amount of bitcoins at an exchange is unknown unless there is a transparent audit. In fact, the earliest bank in human history evolved from exchangers

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July 28, 2015, 09:30:42 AM
 #10


Here is the simplified explanation by example:

Person A deposits 1.000 BTC in bank A. Total bitcoins: 1.000
Bank A loans 0.900 BTC to person B who deposits it in bank B. Total bitcoins: 1.900 BTC
Bank B loans 0.810 BTC to person C who deposits it in bank C. Total bitcoins: 2.710 BTC
Bank C loans 0.729 BTC to person D who deposits it in bank D. Total bitcoins: 3.439 BTC
Bank D loans 0.656 BTC to person E who deposits it in bank E.  Total bitcoins: 4.095 BTC
...



I see now. I guess the only question then is why would anyone want to deposit their bitcoins in a bank??? I can understand the exchanges, but as far as I know no exchanges are offering loans, and I suspect any exchange that started offering loans would be immediately suspect of FRL.

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July 28, 2015, 09:32:09 AM
 #11

In fact, the earliest bank in human history evolved from exchangers

What was the earliest bank in human history? And how did it evolve from exchangers? This sounds like an interesting and informative story. (especially considering our current trust of exchanges)

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July 28, 2015, 09:42:25 AM
 #12

Fractional reserve banking is likely to become a part of the bitcoin economy, but perhaps to a lesser degree than the dollar.
What I fail to understand is how this could even be possible to happen with bitcoin. Can you explain??

Here is the simplified explanation by example:

Person A deposits 1.000 BTC in bank A. Total bitcoins: 1.000
Bank A loans 0.900 BTC to person B who deposits it in bank B. Total bitcoins: 1.900 BTC
Bank B loans 0.810 BTC to person C who deposits it in bank C. Total bitcoins: 2.710 BTC
Bank C loans 0.729 BTC to person D who deposits it in bank D. Total bitcoins: 3.439 BTC
Bank D loans 0.656 BTC to person E who deposits it in bank E.  Total bitcoins: 4.095 BTC
...


Wouldn't that be more difficult since anybody can check their own address on the blockchain and that Bitcoin have a supply limit ?

Yes, it's more difficult.
Most exchanges don't give you a possibility to check if the coins are still there.
Extreme example was MtGox which said to have way more coins that they actually had.
They were running fractional reserve.
I'm sure there are many other centralized services which run fictionalized.
Which is also the reason not to store too many of your coins in their wallets since you're out of control.

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July 28, 2015, 10:29:39 AM
 #13

In fact, the earliest bank in human history evolved from exchangers

What was the earliest bank in human history? And how did it evolve from exchangers? This sounds like an interesting and informative story. (especially considering our current trust of exchanges)

Don't remember exactly, but somewhere I read that pilgrims went to Jerusalem with their own type of money and they have to find exchangers to exchange to local money to spend, those exchangers became the center of capital flow. And because Catholic church prevent people from charging interest, Jews became specialized in the banking service later

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July 28, 2015, 03:21:58 PM
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Person A deposits 1.000 BTC in bank A. Total bitcoins: 1.000
Bank A loans 0.900 BTC to person B who deposits it in bank B. Total bitcoins: 1.900 BTC
Bank B loans 0.810 BTC to person C who deposits it in bank C. Total bitcoins: 2.710 BTC
Bank C loans 0.729 BTC to person D who deposits it in bank D. Total bitcoins: 3.439 BTC
Bank D loans 0.656 BTC to person E who deposits it in bank E.  Total bitcoins: 4.095 BTC
...

Wouldn't that be more difficult since anybody can check their own address on the blockchain and that Bitcoin have a supply limit ?

People that store bitcoins at a bank or other third party don't have an address. They have an account.


When the bitcoin price drop because so much bitcoin is available and the same number of people want some, who's there to "guarantee" it's value? No one. The value disappears.

Yes, FRB will cause severe downward pressure on the value of a bitcoin, countering its rise in value from mass adoption. This is why the value will never be millions of dollars, as some people fantasize.


OR, better yet, when people realize that their loans can't be required to be repaid and they decide not to repay the lender loses and goes out of business, which also requires all lenders to flee in response.

Fractional reserve lending requires that there's an entity that can "create" more money by making loans out of thin air. That can't happen in Bitcoin...not without SEVERE risk to the lender and the account supporting the lender.

Bank runs and default are the major flaws in FRB, but that doesn't mean that it won't be implemented. Banks will lessen the risk by pooling their deposits in order to insure each other.

When the Federal Reserve was created in 1913, the U.S. was on the gold standard and dollars couldn't be created out of thin air. A Bitcoin Federal Reserve would be created to perform the same function as the original Fed, holding deposits to back up its member banks.


I see now. I guess the only question then is why would anyone want to deposit their bitcoins in a bank??? I can understand the exchanges, but as far as I know no exchanges are offering loans, and I suspect any exchange that started offering loans would be immediately suspect of FRL.

Banks will pay interest on deposits. Savers will decide that earning interest is worth the risk.




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July 28, 2015, 07:09:47 PM
 #15

Fractional reserve banking is likely to become a part of the bitcoin economy, but perhaps to a lesser degree than the dollar.

What I fail to understand is how this could even be possible to happen with bitcoin. Can you explain??

It's ALREADY happend.. heard of MT gox.

The thing with bitcoin is there is no man with guns that foces you to accept that the FED defaulted and will force you to contiue to use their corrupt as fuck currency.

The company goes bankrupt and everyone that had cash with them gets fucked.

This is how fractional banking with the gold standard went down.. people were hung back in the 1200's for operating it.. now days people get bailed out by us....... This is why Bitcoin exists enough smart people are tired of getting fucked by the money masters.
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July 28, 2015, 07:45:48 PM
 #16

This is why Bitcoin exists enough smart people are tired of getting fucked by the money masters.


I agree, I don't think banks offering interest to people who keep their bitcoins in their banks will be enough incentive for them to risk "getting fucked by the money masters". I think people will find it suspicious. "let me hold on to your bitcoins for ya, I'll give you some interest"

It makes sense to store your gold with a bank. It makes sense to deposit your fiat in a bank. It does not make sense to store your bitcoins in a bank. I think bitcoin makes banks obsolete and unnecessary. It is riskier to keep your bitcoin in a bank than it is to hold them yourself in your own wallet, i don't think people will do it.

I even think people will find a solution to having to let exchanges hold your bitcoins.

To me it seems the only way that FRB can exist with bitcoin is if lenders can somehow convince massive amounts of people to let them hold their bitcoins for them, and I just don't see that happening. I have seen how the bitcoin lenders on this forum operate and they are very selective about who they give their loans to because they are not using fractional reserve lending, they can't, no one is letting them hold on to their bitcoin for them to keep it safe that's ridiculous, they are lending out only what they really have in reserve and so they are calculating the actual risk of the loans and being very selective. With fractional reserve banking they are loaning out other people's money essentially, and as has been said the federal reserve covers them by printing money out of thin air if the loan goes bad.

I think bitcoin will put an end to FRB. If the only possibilities is banks that offer interest to deposit your bitcoins with them, and exchanges offering loans to people and gambling with peoples deposits, than I think that FRB is essentially dead after bitcoin.

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July 28, 2015, 09:14:48 PM
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This is why Bitcoin exists enough smart people are tired of getting fucked by the money masters.
...
To me it seems the only way that FRB can exist with bitcoin is if lenders can somehow convince massive amounts of people to let them hold their bitcoins for them, and I just don't see that happening. ...

I wouldn't be surprised if the number of bitcoins held by Coinbase, Circle, Xapo, and other wallet providers, as well as the exchanges, already exceeds the total number held by individuals.

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July 28, 2015, 10:00:55 PM
Last edit: July 28, 2015, 10:12:13 PM by johnyj
 #18

I think wallet services like blockchain.info will be the major trend in bitcoin banking: A bitcoin bank can store your private key but you or a third party security firm will hold the encryption password, thus the bank can not use your coin without your authorization, they become some kind of storage solution provider

Holding the private key by yourself has many issues: It can be forgotten, lost, hacked, or even robbed. It will be much safer to let a security firm to protect the key, while you hold the access code

FRB works because previously people have no idea about how money works, but now when everyone are more enlightened by internet, the way they handle money will be different


Banks usually have a function of utilizing the excessive capital: They pool unused money together and make loan to enterprises to drive projects and economy activities. With bitcoin, lending is not possible without the consent of the depositor, but I guess some depositor, being fully aware of the nature of FRB, would still give up the control of their bitcoin in exchange of some interest, because those bitcoin is just pocket change that they don't care at all

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July 28, 2015, 10:43:31 PM
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I wouldn't be surprised if the number of bitcoins held by Coinbase, Circle, Xapo, and other wallet providers, as well as the exchanges, already exceeds the total number held by individuals.

Yes but none of them are giving loans. None of them are lending out their customer's deposits at interest.

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