Bitcoin banks

[Merkuroth]

I had a simple thought that bitcoin banks might be a good idea. Of course, I thought about it a bit and realized, what are banks primarily based on? If you said "Interest", please go do the human race a favor and sterilize yourself. Banks are primarily based on loans. Loans which would not work well with the Bitcoin system, as without centralization, there's no real way to insure that money is repayed, unless they based it on real-world currencies, defeating the point entirely. Banks could also possibly contribute to the hoarding problem. Is there any way bitcoin banks could work without damaging the economy as a whole?

Edit: Well, a couple of minutes after creating this thread, I see there's already one made. Please excuse my lack of foresight in not searching for an existing thread first and delete this one.

[benjamindees]

You can edit the subject and lock the thread.  It will fall off the main page.

[NetTecture]

I had a simple thought that bitcoin banks might be a good idea. Of course, I thought about it a bit and realized, what are banks primarily based on? If you said "Interest", please go do the human race a favor and sterilize yourself. Banks are primarily based on loans. Loans which would not work well with the Bitcoin system, as without centralization, there's no real way to insure that money is repayed, unless they based it on real-world currencies, defeating the point entirely. Banks could also possibly contribute to the hoarding problem. Is there any way bitcoin banks could work without damaging the economy as a whole?

Edit: Well, a couple of minutes after creating this thread, I see there's already one made. Please excuse my lack of foresight in not searching for an existing thread first and delete this one.

You really miss the point here.

First, Banks could make money poviding safe accounts that are not easily forgotten. A central service provider can put a lot of redundancy into a wallet file.

Second, you can totally make bitcoin loans that HAVE to be repaid.

Make a loan contract. Noone says a bitcoin bank has to operate anonymously on the internet. It can be local / country based and make the same contracts normal banks can, run through the same legal system. Courts will look funny, but have to oblige to law. Contract law.

[MarketNeutral]

Banks loan money into existence. If you walk into a bank and get a loan for $30,000, that money wasn't sitting there before you arrived. It was only created when you borrowed it into existence that very moment. $30,000 out of thin air, just like that, thanks to your signature.

See where I'm going with this?

A bitcoin bank would have to be fundamentally different from a modern, fractional-reserve bank.

[Grant]

I had a simple thought that bitcoin banks might be a good idea. Of course, I thought about it a bit and realized, what are banks primarily based on? If you said "Interest", please go do the human race a favor and sterilize yourself. Banks are primarily based on loans. Loans which would not work well with the Bitcoin system, as without centralization, there's no real way to insure that money is repayed, unless they based it on real-world currencies, defeating the point entirely. Banks could also possibly contribute to the hoarding problem. Is there any way bitcoin banks could work without damaging the economy as a whole?

Edit: Well, a couple of minutes after creating this thread, I see there's already one made. Please excuse my lack of foresight in not searching for an existing thread first and delete this one.

There are several ways around it.

There exists a swedish bank that operates without interest, they do it by creating a point system for depositors, which serves exceptionally well as a community bank.
See: http://en.wikipedia.org/wiki/JAK_members_bank and http://jak.se/

The other way is to decentralize the risk, in combination with a rating system (similar to the one we use in BTC-OTC), for each loan someone repays successfully they earn points by the lender. The more points they accumulate the easier they can get a greater loan. Then to decentralize the risk, one could use "the Goldman Sachs trick", package several toprated loans together with shitty ones, and sell it to investors as topclass bonds, as well as sell short options on those loans at bitoptions.org and you have one helluva leveraged fractional-reserve bank.

Problem is that both of these systems can be abused by both the banks, and the debtors.

[drotares]

An Approach to a Crowd Banking System with Bitcoin?

I think it is possible to use Bitcoin because it has become a native currency on the Internet. This approach will work with its own “universal currency” known as points; the idea is to exchange the latter to local currencies or to virtual tokens in a rapid and simple way. Also is an environment for
micro loans based on points where the benefits and risks are shared in a community through prorations based on the weight of the lender. This approach can be used for people who do not participate no have access to the financial institutions.

Crowbe project: www.crowbe.com

What do you think?

[Possum577]

Banks aren't based on loans, that's just how they make money/revenue. They could make their money in other ways and still "hold assets" for customers. Bitcoin banks already exist, check out Coinbase.

[Amph]

better to use an upcoming service like Bazar, which is decentralized and suit more the bitcoin formula

[Borisz]

Since you cannot inflate bitcoin like fiat, assume there is a central bank.

Assume they give interest on holdings and do loans as well with interest rates of 1% and 5%, respectively.

Since they make more money than they give to customers, this would imply that they are continuously gaining more and more coins. Since coins cannot be diluted with inflation, wouldn't this mean that after X time all the coins would belong to the bank?

Of course the whole situation depends on the amount of loans vs interest accounts. Maybe the interest rate could be adjusted so that the above situation never happens. But I think this would be dangerous.

[hazenyc]

A Bitcoin bank, in the traditional sense of the word, would have to offer notes backed by bitcoin. This would not affect the underlying money supply or its rate of creation. These bitcoin-notes could theoretically exceed in quantity (and value too perhaps) of bitcoins themselves. Furthermore these notes would be credit-debt instruments so that when debts are repaid, these notes are essentially destroyed. In the meantime, notes would circulate like currency and debtors could assign their notes to anybody else who may accept them.
Bitcoin notes would be money.
Bitcoin still is not money.

[hazenyc]

Banks aren't based on loans, that's just how they make money/revenue.

Banks ARE based on loans. That is all they do.

Wallet services like Coinbase who simply hold on to funds and make money doing a number of other things including transaction services are NOT banks.

[thejaytiesto]

Well aint the main point of Bitcoin being your own bank? sort of defeats the purpose.

[bitbunnny]

If there'll be a BTC bank, then BTC looses the original sense and whole idea of crypto currency

[Borisz]

A Bitcoin bank, in the traditional sense of the word, would have to offer notes backed by bitcoin. This would not affect the underlying money supply or its rate of creation. These bitcoin-notes could theoretically exceed in quantity (and value too perhaps) of bitcoins themselves. Furthermore these notes would be credit-debt instruments so that when debts are repaid, these notes are essentially destroyed. In the meantime, notes would circulate like currency and debtors could assign their notes to anybody else who may accept them.
Bitcoin notes would be money.
Bitcoin still is not money.

Ok, I thought you meant banks only as a central body for holding funds and interest/loan service.
Issuing notes is a whole new thing. So basically think of Bitcoins as a new type of gold reserves? I'm not sure how many countries would agree to a new currency backed in such a way.

[manselr]

Why the hell would you trust a Bitcoin bank if all the exchanges always end up fucked? whats the difference?

Just own your own BTC; have some responsibility for fuck sakes.

[hazenyc]

A Bitcoin bank, in the traditional sense of the word, would have to offer notes backed by bitcoin. This would not affect the underlying money supply or its rate of creation. These bitcoin-notes could theoretically exceed in quantity (and value too perhaps) of bitcoins themselves. Furthermore these notes would be credit-debt instruments so that when debts are repaid, these notes are essentially destroyed. In the meantime, notes would circulate like currency and debtors could assign their notes to anybody else who may accept them.
Bitcoin notes would be money.
Bitcoin still is not money.

Ok, I thought you meant banks only as a central body for holding funds and interest/loan service.
Issuing notes is a whole new thing. So basically think of Bitcoins as a new type of gold reserves? I'm not sure how many countries would agree to a new currency backed in such a way.

One version of financial history has it that paper money notes originated when goldsmiths holding reserves of gold (think:wallet service) for people recognized that at any given point only x% of those people were coming  up to collect their gold. This meant that they only needed to keep a fraction of gold on hand and could loan or invest the rest of it. The receipts that people leaving gold with goldsmiths held became notes backed by gold and the quantity of gold represented by notes began to exceed the actual physical gold, but this was never a problem as there was always enough debtors in the system to make the notes valuable.

Most banks have been commercial banks: issuing loans to finance investment - in modern terms this is to start a company, expand a company, buy property or finance the acquisition of another company (investment banks specialize in the last one).
A savings bank is a relatively new thing popularized in the U.S. after the Great Depression and due in part to the establishment of the FDIC to guarantee bank deposits up to a certain amount. But savings banks do not sit on cash. Like the goldsmiths of old, they turn around and loan or invest the majority of those funds (up to 90% of them as regulation stands in the U.S. today). No savings bank could survive if it didn't make loans, and that is also why savings deposits accrue interest: not because banks are generous but because you have made a loan to the savings bank by agreeing to deposit funds in your account held there.

Also banks have been around a lot longer historically than central banks. The first central bank was the Bank of Amsterdam which started out as a private commercial bank in 1609 but turned into a de facto central bank in the 18th century after the Netherlands became an international trading hub and gold began flooding in. The Bank of Amsterdam would take merchants' gold, and for a small fee (seigniorage) mint coins that were backed by the full faith and redeemable at the Bank. These 'official' coins became more valuable than the value of the gold contained in them.

The Bank of England is the second central bank, which also started out as a private commercial bank in 1690. It began loaning money to the crown to fund various war efforts and the British empire began racking up a national debt. In 1781 the Bank of England was nationalized and began managing the gold supply and national debt by decree.

There were many banks and banking companies that did not control the money supply, interest rates or target inflation going back to ancient times. The de Medici family ran private banks, financing much of the Renaissance and Enlightenment growth. The Templars undertook commercial banking after the crusades and before that monasteries served as loan facility to the local population.

  

[oblivi]

Why the hell would you trust a Bitcoin bank if all the exchanges always end up fucked? whats the difference?

Just own your own BTC; have some responsibility for fuck sakes.

I trust the Winklevii brothers and their Gemini exchange, seems solid as hell.

[Borisz]

A Bitcoin bank, in the traditional sense of the word, would have to offer notes backed by bitcoin. This would not affect the underlying money supply or its rate of creation. These bitcoin-notes could theoretically exceed in quantity (and value too perhaps) of bitcoins themselves. Furthermore these notes would be credit-debt instruments so that when debts are repaid, these notes are essentially destroyed. In the meantime, notes would circulate like currency and debtors could assign their notes to anybody else who may accept them.
Bitcoin notes would be money.
Bitcoin still is not money.

Ok, I thought you meant banks only as a central body for holding funds and interest/loan service.
Issuing notes is a whole new thing. So basically think of Bitcoins as a new type of gold reserves? I'm not sure how many countries would agree to a new currency backed in such a way.

One version of financial history has it that paper money notes originated when goldsmiths holding reserves of gold (think:wallet service) for people recognized that at any given point only x% of those people were coming  up to collect their gold. This meant that they only needed to keep a fraction of gold on hand and could loan or invest the rest of it. The receipts that people leaving gold with goldsmiths held became notes backed by gold and the quantity of gold represented by notes began to exceed the actual physical gold, but this was never a problem as there was always enough debtors in the system to make the notes valuable.

Most banks have been commercial banks: issuing loans to finance investment - in modern terms this is to start a company, expand a company, buy property or finance the acquisition of another company (investment banks specialize in the last one).
A savings bank is a relatively new thing popularized in the U.S. after the Great Depression and due in part to the establishment of the FDIC to guarantee bank deposits up to a certain amount. But savings banks do not sit on cash. Like the goldsmiths of old, they turn around and loan or invest the majority of those funds (up to 90% of them as regulation stands in the U.S. today). No savings bank could survive if it didn't make loans, and that is also why savings deposits accrue interest: not because banks are generous but because you have made a loan to the savings bank by agreeing to deposit funds in your account held there.

Also banks have been around a lot longer historically than central banks. The first central bank was the Bank of Amsterdam which started out as a private commercial bank in 1609 but turned into a de facto central bank in the 18th century after the Netherlands became an international trading hub and gold began flooding in. The Bank of Amsterdam would take merchants' gold, and for a small fee (seigniorage) mint coins that were backed by the full faith and redeemable at the Bank. These 'official' coins became more valuable than the value of the gold contained in them.

The Bank of England is the second central bank, which also started out as a private commercial bank in 1690. It began loaning money to the crown to fund various war efforts and the British empire began racking up a national debt. In 1781 the Bank of England was nationalized and began managing the gold supply and national debt by decree.

There were many banks and banking companies that did not control the money supply, interest rates or target inflation going back to ancient times. The de Medici family ran private banks, financing much of the Renaissance and Enlightenment growth. The Templars undertook commercial banking after the crusades and before that monasteries served as loan facility to the local population.

Nice read, thanks!

The problem I still see is who would approve and overwatch this? Also, would users be happy with such a centralization? This would turn bitcoin into "cash", well the issued notes, but I guess you get what I mean.

Also, could I also issue notes based on the coins I hold? Or how would the bitcoin & Bitnote (quick invention  ) coexist? Would it be the same to hold 1 BTC or the equivalent Bitnote? If the bank deflates the notes like banks did it with the gold backing, that could lead to value problems.

[hazenyc]

Also, could I also issue notes based on the coins I hold? Or how would the bitcoin & Bitnote (quick invention   ) coexist? Would it be the same to hold 1 BTC or the equivalent Bitnote? If the bank deflates the notes like banks did it with the gold backing, that could lead to value problems.

When the gold standard existed, dollars (and British pounds, French francs etc.) all existed alongside gold.

As for 'deflating', it all depends if you agree that money formation is endogenous or exogenous. Mainstream economics and monetarists assert that money is exogeneous - the supply is set and changed by central banks. In this scenario, deposits create loans: you put money in the bank they lend it out up to the limit they are allowed to and obtain reserves from the central bank. Central bank money is 'multiplied' through fractional reserve banking.

Keynesian, Post-Keynesian, Real-Business-Cycle and Marxian economists endorse endogenous money. Here, loans create deposits instead: a business seeks a loan to undertake a new project to expand their profits. They go to a bank who issues the loan de novo - they basically create the money out of thin air. But that's fine- the company uses the loan money to pay their employees and their suppliers for this new project. The suppliers then pay their employees etc. This money in the form of wages and payments finds its way back to the bank (here our bank can represent the entire banking system) in the form of deposits. If the reserves at the end of the day are not sufficient to support the loan demand, the bank will query the central bank who will only then print the money needed to supply the reserves.

This is a VERY nutshell version and the debate rages among economists as to which is the true description. But what is clear, is that it does not matter if the money is fiat or backed by a gold standard or whatever. The influence on the money (the notes, not the physical bullion in the case of the gold standard -- the gold is not money, the notes are) will be the same anyway.

For bitcoin, if bitnotes become a thing who can be the 'banks'? Miners can, to the degree that they obtain a steady flow of new money each day from 'the system'. But miners are competing with each other to such an extent that they lose profitability over time, so that might not work as well as it might seem at first. Those who have obtained a large supply of BTC through the open market or by conducting business in them could potentially create banknotes against their reserves, but if they are not actively obtaining more each day then they will go bust as soon as demand for notes exceeds their supply enough that a 'run' on the 'bank' would be ruinous. What about wallet services like coinbase or blockchain.info? They could create notes if they could issue loans denominated in BTC but that is not their business- they are payment and merchant services company. They are not interested in using Bitnotes as currency - they want bitcoin itself to be the good stuff. They could pay Bitcoin dividends to account holders from profits generated in their merchant services business but that would make account holders equity shareholders. This makes bitcoin an asset and not a money.

Bitnotes could earn interest as a debtor-creditor obligation and serve as money. But there is a problem in who can issue them without going bust given one or two bad loans.

[drotares]

Bitcoin is gradually maturing and being accepted, the concept of cryptocurrency still remains abstract, however the trend is to create new types of banks with the bitcoin's protocol. Crowbe is one approach.
http://www.crowbe.com/

In the approach the lender has his reward: "The reward is the "return of investment", instead of using some percentage gain,
we define the profit as the extra ammount of points after applying the prorates".