What functions would/could a Bit bank provide?

[Vitalik Buterin]

A bit bank might be just an "additional signature" to someones wealth.

This is actually a good idea. If I had hundreds of thousands of dollars of BTC savings I would love to have it spread out into a multisig transaction with signatures from a few various parties required (eg. a 3-out-of-5 between my brainwallet, my offline paper wallet, my friend and some kind of "bank").

[johnyj]

I think there will be no bank, but many services like online wallet to simplify average people's usage
https://blockchain.info/wallet/

For a standard person he might be concerned about keeping too much assets at home for whatever reason and he want a couple of third party online wallet provider to diversify the risk

[johnyj]

About banking, check this post:


https://bitcointalk.org/index.php?topic=129423.0



For each 16 dollar central bank created, only 9 loaned out eventually

[CurbsideProphet]

Well since banks don't lend out depositor money but rather create new money through loans and fractional reserve banking... I didn't think along those lines. I suppose there could be a bank that offers loans with interest rates for bitcoins.

Of course they lend out depositor money, where do you think the "reserves" in fractional reserves comes from?

From deposits. Reserves are deposits and whatever they lend out is money they create. The fractional reserve originally meant how much gold backs up the money. Now it means how many deposits (which are considered reserves) there are which determines how much new money (through loans) can be given.

If all banks did was lend out other peoples money then there wouldn't be any "fractional reserve" since everything would be a reserve. And............. there wouldn't be any money since that is the mechanism which creates money and if it didn't exist we wouldn't have any.

Of course what this means is that a bitcoin bank that did lend out couldn't lend out in excess of it's reserves. So that automatically limits it's profits as compared to a regular bank that simply creates money and charges interest on that money it creates. But it could still probably be profitable since the way regular banks do it I would consider to be evilly profitable.

Reserves are a percentage of deposits banks are required to hold as mandated by a central bank (The Fed in the case of the US).  The rest of the deposits are loaned out.  You said, "banks don't lend out depositor money" which is incorrect.  Banks do not lend out reserves but they most certainly lend against deposits.

From wikipedia:

Fractional-reserve banking is the practice whereby banks retain only a portion of their customers' deposits as readily available reserves (currency or deposits at the central bank) from which to satisfy demands for payment. The remainder of customer-deposited funds is used to fund investments or loans the bank makes to other customers.Most of these loaned funds are later redeposited into banks, allowing further lending. Thus, fractional-reserve banking permits the money supply to grow to a multiple of the underlying reserves of base money originally created by the central bank.

[Vernon715]

I think that you should have it set up like a normal bank, but with bitcoins only.

If it means the same fractional reserve requirements then I'll pass.

I meant the loan/mortgage part and the savings part; basically, the basic functions of a bank.

[xxjs]

Sound banks

1) A basic storage bank. The bank would keep your bitcoins and not lend them out. 100% reserve. It is like a warehouse. Why would you deposit into such a bank? If you don't trust yourself with a password, if you worry about a fire or something, where you come out of the incident with your life, but nothing else. You could go to the bank, show your face and reclaim your money. You would have to pay to have an account. Services like debit cards could be offered.

2) A savings and loan bank. The bank accepts your deposits, and lend out the coins to house buying. You would have limits of how much and how early you could rewdraw your coins. This would be matched with loan repayments, so there would always be money for all depositors according to their deposit agreements. The bank would qualify the borrowers and the value of the house. There would be only reserves to cover late payments and bad loans. The borrowers would pay interest, this would cover cost of operation and interest to depositors.

Of course, as long as the current fractional reserve bank regime continues, these bank forms would probably be unprofitable.

[notig]

Well since banks don't lend out depositor money but rather create new money through loans and fractional reserve banking... I didn't think along those lines. I suppose there could be a bank that offers loans with interest rates for bitcoins.

Of course they lend out depositor money, where do you think the "reserves" in fractional reserves comes from?

From deposits. Reserves are deposits and whatever they lend out is money they create. The fractional reserve originally meant how much gold backs up the money. Now it means how many deposits (which are considered reserves) there are which determines how much new money (through loans) can be given.

If all banks did was lend out other peoples money then there wouldn't be any "fractional reserve" since everything would be a reserve. And............. there wouldn't be any money since that is the mechanism which creates money and if it didn't exist we wouldn't have any.

Of course what this means is that a bitcoin bank that did lend out couldn't lend out in excess of it's reserves. So that automatically limits it's profits as compared to a regular bank that simply creates money and charges interest on that money it creates. But it could still probably be profitable since the way regular banks do it I would consider to be evilly profitable.

Reserves are a percentage of deposits banks are required to hold as mandated by a central bank (The Fed in the case of the US).  The rest of the deposits are loaned out.  You said, "banks don't lend out depositor money" which is incorrect.  Banks do not lend out reserves but they most certainly lend against deposits.

From wikipedia:

Fractional-reserve banking is the practice whereby banks retain only a portion of their customers' deposits as readily available reserves (currency or deposits at the central bank) from which to satisfy demands for payment. The remainder of customer-deposited funds is used to fund investments or loans the bank makes to other customers.Most of these loaned funds are later redeposited into banks, allowing further lending. Thus, fractional-reserve banking permits the money supply to grow to a multiple of the underlying reserves of base money originally created by the central bank.

If bank lending causes the money supply to grow... then are loans really someone else's money? Obviously they can't be.

[MJGrae]

If bank lending causes the money supply to grow... then are loans really someone else's money? Obviously they can't be.

Obviously it can be and is true. This is exactly what fractional reserve banking is. This is how regular banks "create" money. The depositor still believes that the full amount of their deposit is sitting in their bank account while someone who has a loan out thinks they have that money. The overlap is "new money" because they obviously both can't own the same exact funds, yet theoretically that is exactly what is happening. Those "created" dollars never actually come into existence, though, they only exist on paper.

This is why runs on banks is such bad news. If everyone runs and withdraws all of their money at once from a bank, the bank doesn't have all of those funds because a very large portion is out on loan at any given time.

[notig]

If bank lending causes the money supply to grow... then are loans really someone else's money? Obviously they can't be.

Obviously it can be and is true. This is exactly what fractional reserve banking is. This is how regular banks "create" money. The depositor still believes that the full amount of their deposit is sitting in their bank account while someone who has a loan out thinks they have that money. The overlap is "new money" because they obviously both can't own the same exact funds, yet theoretically that is exactly what is happening. Those "created" dollars never actually come into existence, though, they only exist on paper.

This is why runs on banks is such bad news. If everyone runs and withdraws all of their money at once from a bank, the bank doesn't have all of those funds because a very large portion is out on loan at any given time.

Runs on the bank are only bad news because of rules that banks impose on themselves. Lending and "banking" could be two totally separate institutions but they aren't because of the convoluted self imposed rules banks put on themselves to masquerade the fact that they essentially create money from nothing and charge interest on it.

If person A's money is lent to person B... and person B's money is lent to C... and person C's money is lent to D and so on... and the money supply expands.... and they can all essentially "demand deposit" and spend their money at will... then is person A's money really being lent?  IF a = b and b =c and c = d then a = d. So person D's money is actually person A's.. And person C's money is also A's. ANd person B's money is also A's. If money is lent out multiple times and the total net effect of this is a growth in the money supply which means......... that if there is more money after a loan is created, then new money had to have been created. New money cannot also be older money. Someone's deposit is used as a basis for making another loan.. but the total net effect of what is going on is essentially new money is being created.

Some of these self imposed rules I am talking about are reserves themselves. The one redeeming value they have is that they are essentially one way the banks use to control the money supply itself. But they are a self imposed rule. If banks didn't have a reserve ratio then they would never have "bank runs" because meeting demands could be done without any problem. With the flick of a pen (or keystroke).

If the banking system was honest it wouldn't be as convoluted as it is. There wouldn't be reserves or reserve ratios. As soon as the Federal reserve deposits money and creates reserves at member banks you can calculate from that deposit how much theoretical money can be created knowing the theoretical maximum reserve ratios. So you don't need reserves to constrain the money supply. You could do the same thing through a more direct method.

Here is how an honest banking system would work:

For the public sector (the government), Instead of delegating the power to create money to some cabal (like the Federal reserve) instead you keep the power and create it yourself. You don't need to pay interest to yourself #1.  #2...... you tax back what you create. If you tax back what you create then inflation is impossible.   That's it. Compared to what we have now that is incredibly simple............ and honest. Politicians, however, would not like the idea of only being able to spend what they can directly tax since right now they spend so so much through inflationary (hidden) means.

For the private sector... if people were free to chose then they would pick something honest over something dishonest automatically. Which is probably why bitcoin would win. Or a fully backed currency with no "fractional reserve" part. But... many people ascribe our system of credit to be something worthwhile. Maybe it's not but here is how an honest credit system would work that could possibly compete with bitcoin or a fully backed currency.  If you design a debt based credit system then money is created through loans. What keeps loans from being inflationary is mostly that they are paid back. When money is paid back , the principal is destroyed and the interest is taken as a service fee. An honest system would take a service fee as a service fee. Also..... The amount of total money can be directly controlled. The question on inflation in such a system is important... and the more important question than "how much money " should be created is the length of loans themselves. A 1 minute loan ... is not inflationary at all. A 1 million year loan is entirely inflationary. To limit inflation in such a system you don't need to charge interest on loans. You need to give shorter loans.

[MJGrae]

If bank lending causes the money supply to grow... then are loans really someone else's money? Obviously they can't be.

Obviously it can be and is true. This is exactly what fractional reserve banking is. This is how regular banks "create" money. The depositor still believes that the full amount of their deposit is sitting in their bank account while someone who has a loan out thinks they have that money. The overlap is "new money" because they obviously both can't own the same exact funds, yet theoretically that is exactly what is happening. Those "created" dollars never actually come into existence, though, they only exist on paper.

This is why runs on banks is such bad news. If everyone runs and withdraws all of their money at once from a bank, the bank doesn't have all of those funds because a very large portion is out on loan at any given time.

Runs on the bank are only bad news because of rules that banks impose on themselves. Lending and "banking" could be two totally separate institutions but they aren't because of the convoluted self imposed rules banks put on themselves to masquerade the fact that they essentially create money from nothing and charge interest on it.

If person A's money is lent to person B... and person B's money is lent to C... and person C's money is lent to D and so on... and the money supply expands.... and they can all essentially "demand deposit" and spend their money at will... then is person A's money really being lent?  IF a = b and b =c and c = d then a = d. So person D's money is actually person A's.. And person C's money is also A's. ANd person B's money is also A's. If money is lent out multiple times and the total net effect of this is a growth in the money supply which means......... that if there is more money after a loan is created, then new money had to have been created. New money cannot also be older money. Someone's deposit is used as a basis for making another loan.. but the total net effect of what is going on is essentially new money is being created.

Some of these self imposed rules I am talking about are reserves themselves. The one redeeming value they have is that they are essentially one way the banks use to control the money supply itself. But they are a self imposed rule. If banks didn't have a reserve ratio then they would never have "bank runs" because meeting demands could be done without any problem. With the flick of a pen (or keystroke).

If the banking system was honest it wouldn't be as convoluted as it is. There wouldn't be reserves or reserve ratios. As soon as the Federal reserve deposits money and creates reserves at member banks you can calculate from that deposit how much theoretical money can be created knowing the theoretical maximum reserve ratios. So you don't need reserves to constrain the money supply. You could do the same thing through a more direct method.

Here is how an honest banking system would work:

For the public sector (the government), Instead of delegating the power to create money to some cabal (like the Federal reserve) instead you keep the power and create it yourself. You don't need to pay interest to yourself #1.  #2...... you tax back what you create. If you tax back what you create then inflation is impossible.   That's it. Compared to what we have now that is incredibly simple............ and honest. Politicians, however, would not like the idea of only being able to spend what they can directly tax since right now they spend so so much through inflationary (hidden) means.

For the private sector... if people were free to chose then they would pick something honest over something dishonest automatically. Which is probably why bitcoin would win. Or a fully backed currency with no "fractional reserve" part. But... many people ascribe our system of credit to be something worthwhile. Maybe it's not but here is how an honest credit system would work that could possibly compete with bitcoin or a fully backed currency.  If you design a debt based credit system then money is created through loans. What keeps loans from being inflationary is mostly that they are paid back. When money is paid back , the principal is destroyed and the interest is taken as a service fee. An honest system would take a service fee as a service fee. Also..... The amount of total money can be directly controlled. The question on inflation in such a system is important... and the more important question than "how much money " should be created is the length of loans themselves. A 1 minute loan ... is not inflationary at all. A 1 million year loan is entirely inflationary. To limit inflation in such a system you don't need to charge interest on loans. You need to give shorter loans.

Congratulations, in a very long post you have convinced me that you have no idea what you're talking about, and that I'll probably never believe otherwise. If you take out the fractional reserve method, there is no bank lending. There is no bank lending, because there's no capital to do it with, since you have to have 100% on hand at all times. Good luck buying a car. In order to finance any sort of credit or loan we now resort to finding loan sharks who like to break kneecaps if you're a dollar late on your payment instead of paying a little extra.

Are you insane? Do you even know what the word economics is? Inflation.. Impossible? This conversation should end right here. More people are added to the system every day, without increasing the money supply ever you actually would create deflation as the available money supply gets spread thinner and thinner among an ever increasing population. Deflation is also bad.

You also don't understand how lending works. Theoretical new money is created through lending, not actual new money. If person A, B, C, and D are the only depositors at a bank, and they all have loans out for the total value of the bank, then if they were to all demand their deposited money without paying off any of the loans then the bank would have a negative net worth of the entire bank. The bank lends people's money out to others while still acknowledging that the money lent mostly belongs to others. If the depositors of a bank demand their money, they are contractually and legally obligated to provide it by all means necessary including liquidating the bank and all real assets it holds. As long as loans are out, and everyone isn't demanding their money at the same time, there is extra money in the system only on paper because it is double counted by both the person who received a loan, and the person who's funds were used to fund the loan. Person A's money above the reserve amount is not lent out multiple times. It is lent out once. A bank can not lend more than it currently has above reserves (unless it borrows this money from other banks). It cannot lend the same funds out once. Also, when a person takes out a loan, that is not THEIR money. It is the bank's money, and by extension the depositor's money.

Your entire theory of economics and finance is wrong, not only is it wrong but it is bad, and you should feel bad. Take a class.

P.S. money and banking will ALWAYS be convoluted. No matter how honest it is. Just look around you, even bitcoin has its issues when it comes to security, processing, dishonest individuals, unpaid loans, etc.

[xxjs]

If you take out the fractional reserve method, there is no bank lending. There is no bank lending, because there's no capital to do it with, since you have to have 100% on hand at all times. Good luck buying a car. In order to finance any sort of credit or loan we now resort to finding loan sharks who like to break kneecaps if you're a dollar late on your payment instead of paying a little extra.

Non fractional reserve bank lending:

If the bank lends out the money, but restricts the depositor to only redraw the money when the loan is repaid, there is no money creation. With hundreds of depositors and hundreds of borrowers, this could be quite flexible. The lending would oil the wheels of commerce, but money is not created.

The depositor would not feel that he still had the money in his posession, only he would know that he had the right to get the money back. This is different from now, where the deposit is at your disposal immediately, even when it is lent out.

[MJGrae]

If you take out the fractional reserve method, there is no bank lending. There is no bank lending, because there's no capital to do it with, since you have to have 100% on hand at all times. Good luck buying a car. In order to finance any sort of credit or loan we now resort to finding loan sharks who like to break kneecaps if you're a dollar late on your payment instead of paying a little extra.

Non fractional reserve bank lending:

If the bank lends out the money, but restricts the depositor to only redraw the money when the loan is repaid, there is no money creation. With hundreds of depositors and hundreds of borrowers, this could be quite flexible. The lending would oil the wheels of commerce, but money is not created.

The depositor would not feel that he still had the money in his posession, only he would know that he had the right to get the money back. This is different from now, where the deposit is at your disposal immediately, even when it is lent out.

That basically entails a money-market account. And if that were the optimal way to do things that everybody wanted, why doesn't everybody do it?

And in terms of "greasing the wheels of commerce", I would be willing to bet that the net economic benefit of this system is less than half of the benefit of fractional reserve since finding people that are willing to essentially loan their funds out by depositing it in the bank and not having the "guarantee" that they will get the funds back is less than (actually, much less than) half of the people with money to deposit. Just speculation there, but please, prove me wrong.

[xxjs]

If you take out the fractional reserve method, there is no bank lending. There is no bank lending, because there's no capital to do it with, since you have to have 100% on hand at all times. Good luck buying a car. In order to finance any sort of credit or loan we now resort to finding loan sharks who like to break kneecaps if you're a dollar late on your payment instead of paying a little extra.

Non fractional reserve bank lending:

If the bank lends out the money, but restricts the depositor to only redraw the money when the loan is repaid, there is no money creation. With hundreds of depositors and hundreds of borrowers, this could be quite flexible. The lending would oil the wheels of commerce, but money is not created.

The depositor would not feel that he still had the money in his posession, only he would know that he had the right to get the money back. This is different from now, where the deposit is at your disposal immediately, even when it is lent out.

That basically entails a money-market account. And if that were the optimal way to do things that everybody wanted, why doesn't everybody do it?

And in terms of "greasing the wheels of commerce", I would be willing to bet that the net economic benefit of this system is less than half of the benefit of fractional reserve since finding people that are willing to essentially loan their funds out by depositing it in the bank and not having the "guarantee" that they will get the funds back is less than (actually, much less than) half of the people with money to deposit. Just speculation there, but please, prove me wrong.

Yes it is like a lending consortium. It is not profitable under the current circumstances. A fractional reserve bank is always more profitable, since it can essentially lend the money multiple times. Until it crashes of course, but that is no problem for the depositors nor the investors. Benny and the Jets come to the rescue. A lending consortium would be possible if fractional reserve banking is outlawed, or when the banks and depositors are not bailed out by the public.

[MJGrae]

Yes it is like a lending consortium. It is not profitable under the current circumstances. A fractional reserve bank is always more profitable, since it can essentially lend the money multiple times. Until it crashes of course, but that is no problem for the depositors nor the investors. Benny and the Jets come to the rescue. A lending consortium would be possible if fractional reserve banking is outlawed, or when the banks and depositors are not bailed out by the public.

Money can't be lent multiple times. It is lent once until it is paid back. Why is this so hard for you two to understand? Once money leaves the bank in the form of a loan, it is gone. HOWEVER, if somebody's money is lent out and then that person demands their deposit back, the bank must find another individual's funds to then cover that loan. Lend once, wait for repayment, lend again. Also, it only crashes because of A) dishonest or idiotic individuals taking out more than they KNOW they can pay back, or B) unusual circumstances leave many, many, many, MANY people unable to repay loans.

Being bailed out by the public is an off-topic subject, in what I'm analyzing. This is the function of a regular bank discussion, not a central bank.

[DannyHamilton]

. . . A) dishonest or idiotic individuals lending out more than they KNOW the borrower can pay back . . .

FTFY

Why would it be the responsibility of the borrower to protect the assets of the bank and the bank's depositors?

[MJGrae]

FTFY

Why would it be the responsibility of the lender to protect the assets of the irresponsible?

FTFY

[DannyHamilton]

FTFY

Why would it be the responsibility of the lender to protect the assets of the irresponsible?

FTFY

If the lender has access to enough assets of the irresponsible borrower to cover the value of the loan then this isn't a situation where "Lend once, wait for repayment, lend again" would crash.  The lender simply takes control of the borrowers assets and exchanges them for enough currency to cover repayment.

You were specifically referencing a situation where your "Lend once, wait for repayment, lend again" crashes.  That only happens if the lender is irresponsible and has lent more money to someone than they KNOW they can recover.

It is not necessary for the lender to protect the assets of the borrower, but it absolutely necessary for the lender to protect their own assets.

[MJGrae]

If the lender has access to enough assets of the irresponsible borrower to cover the value of the loan then this isn't a situation where "Lend once, wait for repayment, lend again" would crash.  The lender simply takes control of the borrowers assets and exchanges them for enough currency to cover repayment.

You were specifically referencing a situation where your "Lend once, wait for repayment, lend again" crashes.  That only happens if the lender is irresponsible and has lent more money to someone than they KNOW they can recover.

It is not necessary for the lender to protect the assets of the borrower, but it absolutely necessary for the lender to protect their own assets.

Uh, right. That's called a secured loan, which is the vast majority of major loans. The banks do this.

That's why some banks didn't really care if you could pay back, because they knew that their loans were tied to an asset that would cover the lost capital. Do you really think banks would make a loan that wasn't 99% likely to be repaid either by the borrower or through the repossession of the asset being borrowed for?

The vast majority of the time the bank's assets are more than protected. It's the borrower that isn't, and rightly so. (rightly except for the few banks that purposely added malicious terms to their loans so discretely that even most bankers didn't know what was going on)

[DannyHamilton]

If the lender has access to enough assets of the irresponsible borrower to cover the value of the loan then this isn't a situation where "Lend once, wait for repayment, lend again" would crash.  The lender simply takes control of the borrowers assets and exchanges them for enough currency to cover repayment.

You were specifically referencing a situation where your "Lend once, wait for repayment, lend again" crashes.  That only happens if the lender is irresponsible and has lent more money to someone than they KNOW they can recover.

It is not necessary for the lender to protect the assets of the borrower, but it absolutely necessary for the lender to protect their own assets.

Uh, right. That's called a secured loan, which is the vast majority of major loans. The banks do this.

That's why some banks didn't really care if you could pay back, because they knew that their loans were tied to an asset that would cover the lost capital. Do you really think banks would make a loan that wasn't 99% likely to be repaid either by the borrower or through the repossession of the asset being borrowed for?

The vast majority of the time the bank's assets are more than protected. It's the borrower that isn't, and rightly so. (rightly except for the few banks that purposely added malicious terms to their loans so discretely that even most bankers didn't know what was going on)

Ok, so if we are in agreement about secured loans, then explain what you meant by this statement:

"Also, it only crashes because of A) dishonest or idiotic individuals taking out more than they KNOW they can pay back"

What crashes?  Why does it crash?

[MJGrae]

If the lender has access to enough assets of the irresponsible borrower to cover the value of the loan then this isn't a situation where "Lend once, wait for repayment, lend again" would crash.  The lender simply takes control of the borrowers assets and exchanges them for enough currency to cover repayment.

You were specifically referencing a situation where your "Lend once, wait for repayment, lend again" crashes.  That only happens if the lender is irresponsible and has lent more money to someone than they KNOW they can recover.

It is not necessary for the lender to protect the assets of the borrower, but it absolutely necessary for the lender to protect their own assets.

Uh, right. That's called a secured loan, which is the vast majority of major loans. The banks do this.

That's why some banks didn't really care if you could pay back, because they knew that their loans were tied to an asset that would cover the lost capital. Do you really think banks would make a loan that wasn't 99% likely to be repaid either by the borrower or through the repossession of the asset being borrowed for?

The vast majority of the time the bank's assets are more than protected. It's the borrower that isn't, and rightly so. (rightly except for the few banks that purposely added malicious terms to their loans so discretely that even most bankers didn't know what was going on)

Ok, so if we are in agreement about secured loans, then explain what you meant by this statement:

"Also, it only crashes because of A) dishonest or idiotic individuals taking out more than they KNOW they can pay back"

What crashes?  Why does it crash?

Okay, you're right, I phrased that sentence entirely wrong. It should have read "The system only fails when many individuals default on loans that were more than they could reasonably pay almost instantaneously and the bank is left with the majority of its net worth in illiquid assets at which point a large population of the bank's depositors withdraw."

Better?