Fractional reserve banking

[peterz]

But I think bitcoin will end up with fractional reserve layer on top simply because 95% of end users will allow it. They simply don't understand what fractional reserve is. Final end users will only know that their currency is "backed" by bitcoin and may see a nice reassuring holoram on their card or something. They will know nothing of the blockchain etc. And if you try and tell them about fractional reserve they will glaze over as soon as the first word "fraction..." passes your lips.

Well you are right, that people won't understand the intricacies, but I believe they will very well understand when somebody tell them, "Hey your bank doesn't have all your money". They will take them out ASAP, thus all finance business will avoid using FRB to avoid being vulnerable to bank run.

I think in history there was never FRB sustained without government intervention.

[yucca]

But I think bitcoin will end up with fractional reserve layer on top simply because 95% of end users will allow it. They simply don't understand what fractional reserve is. Final end users will only know that their currency is "backed" by bitcoin and may see a nice reassuring holoram on their card or something. They will know nothing of the blockchain etc. And if you try and tell them about fractional reserve they will glaze over as soon as the first word "fraction..." passes your lips.

Well you are right, that people won't understand the intricacies, but I believe they will very well understand when somebody tell them, "Hey your bank doesn't have all your money". They will take them out ASAP, thus all finance business will avoid using FRB to avoid being vulnerable to bank run.

I think in history there was never FRB sustained without government intervention.

Have you ever tried telling someone "Hey your bank doesn't have all your money"? If not give it a shot. You will find the FRB system has installed some kind of firewall closing all logical ports resulting in most people thinking you're full of it or that you're trying to con them somehow.

But indeed throughout history all debasement experiments have ended in "failure" from the end user perspective, conversely viewed through the eyes of the schemes originator they have been very succesful (except for the ones that got beheaded).

[bitcoinfuturefiction]

it's like overbooking airlines

[darkmule]

Is fractional reserve banking (i.e. lending based on a fractional reserve) incompatible with BTC?

I suppose not inherently, but it is not only rather against the philosophy of BTC and many of those who hold it, who would therefore probably never adopt such a system, but it is also against the current characteristics of the currency, which might make it very difficult suddenly to acquire BTC if there were a sudden demand.

So I'd say yes, it is incompatible with BTC and can be expected to be so for at least the short and mid-term future, and perhaps for the rest of its existence.

I would never keep BTC with an entity that did not have access to its full complement of deposited BTC, though I would prefer some large percentage of that store of BTC be kept in cold storage of some kind in case of hacks, even if that sometimes led to inconvenience.

Actually, I generally would not keep BTC with any entity other than myself for any length of time, if I could avoid it.

[rherena]

Not possible. Regulators would need to verify the exact value of BTC held as capital. Why a bank would hold capital in the form of BTC would basically be an admission that the fiat they would regularly deal in is suspect. This is among many issues.

If they believe that the currency they deal is risky enough to not hold the fiat or deal in it, then why bother being a bank in that currency? The only real way for BTC to exist in fractional reserve banking is for it to be held as capital, or as a speculative asset. There are clear problems with both.

Given that banking is a risky business why add to the risk by holding a clearly risky currency which can't really be loaned, or transacted in without the assurances of the law itself? Not to many banks holding currency itself anyway, as it needs to earn carry. Not to mention that there are no current capital rules regarding BTC, so banks would have to hold the same amount of capital as investing in stocks.
Until BTC is integrated into the financial system there are likely to never be capital rules drafted, thus to banks it will always be a speculative asset. While we are on the topic of rules, if you were playing bank regulator and a bank was making a loan in BTC, in the event of default what legal recourse would the bank, or anyone else have to remedy the loss itself? If I could simply walk from a BTC loan the interest rate would have to be astronomically high. In that case why not just take a loan in fiat? Esp with the rise of internet banking.


As a speculative asset BTC would rank as less than penny stocks IMO. Your best case scenario is that you get in early. However any security issues, data problems and security could result in complete loss of capital. Most banks are to risk averse to be making this kind of bet. As if it can't be exchanged for other assets that banks can hold or exchange in to return seeking assets or currency for investments then its worthless to banks.

Not to mention the type of size that would be needed for transactions would mean >10% (very rough estimate) of people would need to hold assets in BTC. Something you just wont get people to do until computer literacy is ubiquitous.



Long story short BTC and online currency need some legitimacy from the system itself to integrate into the banking system, unfortunately this defeats some of the purpose of being a non regulatable entity under no government control.

[drhobomanxxiii]

I see a lot of people misunderstanding the topic at hand...

Some are talking as if more notes must be printed for FRB to work. Others are talking about it as if bitcoin would be what backs the notes. This isn't the case as the only "notes" that would be used are those of the account holder. Essentially, that's just a login stating that you own the account with the bank. In this case, the bitcoins wouldn't be stored, they would be what's given out as the notes. If it's gold you're talking about, think of it as holding an account with the bank, but the gold is lent out. That's the form that bitcoin FRB would have to take to work.

Others look at history and say that, eventually, all FRB schemes fail without government intervention without analyzing the causes for that failure. Most cases have government intervention in the loanable funds market in some way, such as the manipulation of the money supply or interest rates (monetary manipulation,) or problems with moral hazard (FDIC, etc.) Sans that manipulation, manipulation which is either extremely difficult or impossible to create in the bitcoin economy, such systems have existed and have created stability.

Others still seem to think that the only way for FRB to exist with bitcoin is for it to be melded into the current financial structure, but that's certainly not the case. What will most likely happen is that wallet services will become the more secure and more useful provider of funds management. For example, someone will most likely create a bitcoin based debit card or phone app that must work through their system (much like VISA for debit cards working through your bank account,) in which case there's reason to believe that others will create competing systems. Through this process, a depository system will be constructed in which interest rates will become a competing factor -- this will require a fractional reserve system, or deposits that aren't 100% on demand. The competing process here will set reserve rates as opposed to interest rates.

Hopefully this is helpful to those who have responded.

[bitfever]

Interesting topic...  If bitcoin is severely deflationary, then the amounts required to loan out would get smaller in the long run, so that could help bolster the reserve.  Also, it would solve the hoarding problem to get bitcoins in circulation, but that would then inflate the coins, so some kind of equilibrium, and maybe value stability would occur to strengthen the currency function of bitcoins.

[Rodyland]

I have a feeling some are conflating FRB with "debt as money".
     

[drhobomanxxiii]

Bitfever, that really depends on what makes it deflationary. If it's an increase in productive uses, then it may actually be done with an increase in lending despite the higher real cost to borrowing. It all depends on what the market is "trying to get done," in a sense.

[yucca]

I see a lot of people misunderstanding the topic at hand...

Some are talking as if more notes must be printed for FRB to work. Others are talking about it as if bitcoin would be what backs the notes. This isn't the case as the only "notes" that would be used are those of the account holder. Essentially, that's just a login stating that you own the account with the bank. In this case, the bitcoins wouldn't be stored, they would be what's given out as the notes. If it's gold you're talking about, think of it as holding an account with the bank, but the gold is lent out. That's the form that bitcoin FRB would have to take to work.

Others look at history and say that, eventually, all FRB schemes fail without government intervention without analyzing the causes for that failure. Most cases have government intervention in the loanable funds market in some way, such as the manipulation of the money supply or interest rates (monetary manipulation,) or problems with moral hazard (FDIC, etc.) Sans that manipulation, manipulation which is either extremely difficult or impossible to create in the bitcoin economy, such systems have existed and have created stability.

Others still seem to think that the only way for FRB to exist with bitcoin is for it to be melded into the current financial structure, but that's certainly not the case. What will most likely happen is that wallet services will become the more secure and more useful provider of funds management. For example, someone will most likely create a bitcoin based debit card or phone app that must work through their system (much like VISA for debit cards working through your bank account,) in which case there's reason to believe that others will create competing systems. Through this process, a depository system will be constructed in which interest rates will become a competing factor -- this will require a fractional reserve system, or deposits that aren't 100% on demand. The competing process here will set reserve rates as opposed to interest rates.

Hopefully this is helpful to those who have responded.

Well bitcoin IS like gold. FRB issues promisary notes for an asset, regulation fixes a maximum issuance:asset ratio.

In the case of the Bretton Wood System that asset backing was gold. A new Bretton Woods system could be created on top of bitcoin just the same.

I bolded the part in your quote that would be nice to happen, but probably wont, eventually mainsteam users will probably ride the fractional system on top. Which will allow inflation/deflation control for governments.

In the case of the gold system one might think: At least the asset backing (gold) can be audited, trouble is that some auditors can be persuaded to say anything when regularly gifted with a hotel room full of top class hookers etc. But with bitcoin the audit could be (and should be) public data, so that's a big plus to a FRB with bitcoin. There could be no shadow stats, the true FRB ratio would be public.

[🏰 TradeFortress 🏰]

I'm already doing fractional reserve banking at coinlenders. You give me coins, I pay interest on them and lend it out to others.

[unity100]

Is fractional reserve banking (i.e. lending based on a fractional reserve) incompatible with BTC?

They will show the bitcoin as collateral (asset), and lend money up to 10x value of that bitcoin. (horribly insane fractional reserve lending allowance in us law).

or, they can create an 'asset' (hedge fund) by indexing it on bitcoin, then start trading and inflating the hedge fund's value, and then show both bitcoin and the hedge fund as assets (duplicate !!!!) and then lend 10x value of those totals as money.

by the way, that last bit was how the financial scam was pulled in wall street - that lead up to the 2008 crash.

[Mouser]

Heavens to Betsy!

Fractional reserve banking is what gave Rothschild control over the world and at the same time made the people of the world debt slaves through usury.

BTC is not fractional. BTC is usury free. That is why I believe in it. That is why I bought it.

Hundredth or centiBTC (cBTC) and thousandth or milliBTC (mBTC) and millionth or microBTC (uBTC) need to be introduced as needed so BTC can continue to be used as currency which is where its value lies at a level which is confortable to people everywhere.

$266 BTC are unwieldly for most people to use as currency.

When BTC reaches $200+ again it should be reset to $2+ (cBTC) so it can continue to easily be used as currency. BTC value is as a currency. There are a fixed amount of units. To accomodate new users and fluid trade a currency reset or splitting at successive points is required. No wealth or value is ever lost and BTC stays at a currency comfort level for trade.

[rherena]

I see a lot of people misunderstanding the topic at hand...

Some are talking as if more notes must be printed for FRB to work. Others are talking about it as if bitcoin would be what backs the notes. This isn't the case as the only "notes" that would be used are those of the account holder. Essentially, that's just a login stating that you own the account with the bank. In this case, the bitcoins wouldn't be stored, they would be what's given out as the notes. If it's gold you're talking about, think of it as holding an account with the bank, but the gold is lent out. That's the form that bitcoin FRB would have to take to work.

Others look at history and say that, eventually, all FRB schemes fail without government intervention without analyzing the causes for that failure. Most cases have government intervention in the loanable funds market in some way, such as the manipulation of the money supply or interest rates (monetary manipulation,) or problems with moral hazard (FDIC, etc.) Sans that manipulation, manipulation which is either extremely difficult or impossible to create in the bitcoin economy, such systems have existed and have created stability.

Others still seem to think that the only way for FRB to exist with bitcoin is for it to be melded into the current financial structure, but that's certainly not the case. What will most likely happen is that wallet services will become the more secure and more useful provider of funds management. For example, someone will most likely create a bitcoin based debit card or phone app that must work through their system (much like VISA for debit cards working through your bank account,) in which case there's reason to believe that others will create competing systems. Through this process, a depository system will be constructed in which interest rates will become a competing factor -- this will require a fractional reserve system, or deposits that aren't 100% on demand. The competing process here will set reserve rates as opposed to interest rates.

Hopefully this is helpful to those who have responded.

Well bitcoin IS like gold. FRB issues promisary notes for an asset, regulation fixes a maximum issuance:asset ratio.

In the case of the Bretton Wood System that asset backing was gold. A new Bretton Woods system could be created on top of bitcoin just the same.

I bolded the part in your quote that would be nice to happen, but probably wont, eventually mainsteam users will probably ride the fractional system on top. Which will allow inflation/deflation control for governments.

In the case of the gold system one might think: At least the asset backing (gold) can be audited, trouble is that some auditors can be persuaded to say anything when regularly gifted with a hotel room full of top class hookers etc. But with bitcoin the audit could be (and should be) public data, so that's a big plus to a FRB with bitcoin. There could be no shadow stats, the true FRB ratio would be public.

As i stated above there is a clear issue lending in BTC, first and foremost is trust. Assuming online banking in BTC somehow resolves this issue, how would the legal system handle an online currency, in issues like default, or fraud ? Also banks need to comply with things like anti-money laundering and anti-terrorism rules. There seems to be no clear way for that to verified in BTC.

 

[BitGoing]

This is a quite scary possibility. But true, it could have happened.
Same with US gold reserves. Germany keeps their Gold at New York Fed vault. It has not examined it's holdings in 30 years. Many claim that US may not even have German gold, but for as long as it say it does have it, Germany can say it owns 200+ tons of gold.  It is actually may not be smart of them to demand to examine it. Because if they do and Gold is not there, Germany loses it's credibility.   Funny thing, it is sometimes better for somebody just say that you have it rather than actually having it.   

This absolutely can work, and has happened (or at least I suspect it has).

mtgox keeps all of its bitcoins in its wallet and not tied to any particular users. It maintains user account balances in its database. It has been hacked before and I suspect lost a portion of its assets while maintaining user account balances. It also may have had occasional theft, accounting errors, and perhaps some investment spending using bitcoins. So if user account balances total 1000 bitcoins, it is totally possible that mtgox only has some fraction of those bitcoins (and USD) available to pay out. I suspect that many new investors in bitcoins don't even have a wallet outside of mtgox as they are just in the speculation game, so it makes it even easier for mtgox to maintain a only a fraction of the balances of the accounts in its reserves.

Now, this doesn't mean that they are really doing this, but I have no reason to believe that they are not, and they are not the bastion of transparency. Heck, if they sold off 50% of their stockpile into cash right now, they would have a lot of fiat to work with, and it would be likely that users would never be the wiser. Maybe they could play even riskier and keep only 10% of the bitcoins.

What makes this possible scenario interesting is that this actually inflates the money supply. If there were only 1000 bitcoins in existence, and 500 were in gox balances, and gox spent 400 of them keeping 100 in reserve, there would be in effect 1400 bitcoins in circulation, even though there are only 1000 real bitcoins.

As someone on the sidelines I eagerly wait until there is a run on mtgox and keep a stockpile of popcorn on hand. Only then will we see what is going on in their backrooms.

[yucca]

Heavens to Betsy!

Fractional reserve banking is what gave Rothschild control over the world and at the same time made the people of the world debt slaves through usury.

BTC is not fractional. BTC is usury free. That is why I believe in it. That is why I bought it.

Hundredth or centiBTC (cBTC) and thousandth or milliBTC (mBTC) and millionth or microBTC (uBTC) need to be introduced as needed so BTC can continue to be used as currency which is where its value lies at a level which is confortable to people everywhere.

$266 BTC are unwieldly for most people to use as currency.

When BTC reaches $200+ again it should be reset to $2+ (cBTC) so it can continue to easily be used as currency. BTC value is as a currency. There are a fixed amount of units. To accomodate new users and fluid trade a currency reset or splitting at successive points is required. No wealth or value is ever lost and BTC stays at a currency comfort level for trade.

Gold is not fractional, yet the Bretton Woods system was built upon it, the same could happen to bitcoin.

Do you think a finite BTC coinbase limited to $2 per coin will go very far? maybe for a small island, but such a limitation would prevent global adoption. There's simply alot of cash out there looking for somewhere safe to go.

[richard_dein]

With FRB all the money that goes around the world is credit. Usually there's something backing a type of money, like a commodity (Gold) that has a rather stable price tag, or a different kind of credit (e.g. foreign currency).

Bitcoin is in many ways like gold. There's a limited supply and a slow production rate. They are almost indestructible. It's also pretty easy to define whether someone owns Bitcoins or gold. There are many valuable properties in gold that can be found in gold, and those are the major reasons gold has grown to become an easy-to-recognize store of value. On the other hand Bitcoin has lower maintenance than gold (e.g. transportation and maintenance).

In the end it would seem that Bitcoin isn't competing with fiat; it's competing with gold. If banks lend out and take in Bitcoins, or even vouchers to redeem Bitcoins, I agree that this kind of system, as form of FRB, will fail. On the other hand, nothing stops forks from appearing. Maybe some day there will be a fork that works more like fiat money, except that banks themselves can't print it quickly themselves.

[yucca]

I'm already doing fractional reserve banking at coinlenders. You give me coins, I pay interest on them and lend it out to others.

Then you're doing banking, but not fractional reserve banking. Unless your lending out promisary notes at a 10X multiplier for bitcoins you dont have on account.

So say you have 10 bitcoins in your acount you lend out 100 bitcoin promises in the form of 10%bitcoin 90%IOUs but only pay interest on the real 10 to your lenders. This means you as the bank can collect interest on 90 imaginary bitcoins, sounds like an easy moneymaker eh? well it is so long as all the IOUs dont get called on at once.

Some argue that fractional reseve is needed for inflation/deflation tweaks, and there is merit to that argument, but to use a ratio of 10:1 just takes the piss!

If one of us setup such a scheme we would be labelled criminal, for setting up a pyramid style scam, and rightly so!

Mathematically any ecenomic system that relies on ever increasing growth to survive is destined to fail, because we live in a finite world.

[yucca]

Should anyone want to really understand what fractional reserve banking IS then watch this very good youtube vid.

It is not mathematically heavy and does an EXCELLENT job of describing it.

It is logical and truthful in its explanation of FRB:

PLEASE FIND TIME TO WATCH THIS:

http://www.youtube.com/watch?v=jqvKjsIxT_8

[darkmule]

Some argue that fractional reseve is needed for inflation/deflation tweaks, and there is merit to that argument, but to use a ratio of 10:1 just takes the piss!

This is why I don't see this happening in Bitcoin-land.  So many of the core people involved with Bitcoin reject this argument, and to many, it is a core value that fractional reserve banking is, ipso facto, a form of fraud, that I think people would stay away from it in droves.

So I don't see it as practical because the community would reject it.  

Personally, I think FRB has its merits in the so-called "real world" of banking, but it has significant demerits that I think most Bitcoin users do not want, at least not in Bitcoin.  I do not want to see widespread FRB in BTC.  If nothing else, it would take a lot of the fun out of the market.