Bitbank proposal

[LaggedOnUser]

I have an idea for a new type of software to work with Bitcoin.  I call it the "Bitbank".  This isn't a modification of the Bitcoin software itself, but rather an additional layer of software to wrap around Bitcoin in order to improve its functionality.  It could work with any altcoin that uses a similar peer-to-peer transaction system, not just Bitcoin.

A Bitbank would be a separate open source project from Bitcoin to implement a standardized banking system for bitcoins.  The idea is that a trusted 3rd party, your local bank, stores your bitcoins for you.  They also cooperate with local businesses that accept bitcoins, who have an account there.  They keep a separate internal ledger from bitcoins that maintains everyone's balance.  Whenever a local transfer occurs, they instantly make a balance adjustment without actually transferring any bitcoins.

Whenever an accumulation of interbank transfers of sufficient size occurs, they can actually broadcast the transaction to other bitbanks or users, thus settling it.  If there were a trusted network of bitbanks, they could speed this process up as well.  Two bitbanks within the network could transfer funds on a ledger between them throughout the day, and only settle accounts when the difference exceeded a certain threshold ($100,000) or a certain time period (1 day).  Thus purchases could be made throughout the network continuously and only be settled intermittently.  Unlike Bitcoin, these transactions would be based on a certain level of trust, which would imply some type of real-world accountability to contract or law, or a business relationship, before it would work.

This would greatly reduce the amount of actual bitcoin transactions needed, thus taking pressure off the network.  The bitcoin network would resemble more an "interbank clearing network" than an "all to all transaction network".  Since small transactions, such as buying a cup of coffee, only result in an internal ledger entry in the bank, they can be done instantly.  Furthermore, having less transactions on the network makes it run faster overall (solves "confirmation delay" problem).

Given the existence of such software, it can be promoted to local banks and businesses, so they can start offering bitcoin services with less effort to their regular customers (solves "Little or No Usage outside collection and exchange" problem).

Banks on an existing network trust each other, thus they can collaboratively defragment the bitcoin base.  A bank can also do this internally.  The reduction of actual bitcoin transactions also helps reduce fragmentation and loss (solves the "bit dust" problem).

Your local bank or business can convert cash or bank balance to bitcoins on the spot (solves the "Lack of Decentralized Exchange Mechanism" problem).

Finally, the bank can offer services at their existing branches and ATMs denominated in bitcoins, with support for the general public (solves the "Difficult for non-technical users to adopt" problem).

This proposal has the additional benefits:
* Works with existing Bitcoin or altcoin network and does not require new currency creation
* Users don't have to act as their own bank and worry about accidental deletion, loss or theft of bitcoins
* Users can "bank with bitcoin" without even owning a computer
* Participation by existing financial institutions gives bitcoin an air of legitimacy
* Does not prevent existing anonymous, decentralized use of Bitcoin

I notice there is already at least one place calling itself a "bitcoin bank" (http://www.flexcoin.com/) that is trying to solve bitcoin problems by wrapping its software in a banking layer.  I think that is a good idea.

In addition, Bitcoin is already evolving toward a banking model given the high cost of storing a full transaction chain and performing mining operations.  This would help it along in the right direction.

Thoughts, anyone?

TL;DR - Imagine a new open source software called a Bitbank that stores a collection of bitcoins, enabling intrabank and interbank transfers that are much faster and more efficient, while using the existing Bitbank network for clearing interbank transactions.  Why not?

[Chet]

Whats the next step - local banks can do fractional reserve lending of BTC?

[Brushan]

I think whether we want it or not, OP's idea is something that is bound to happen in a near future.

[LaggedOnUser]

Whats the next step - local banks can do fractional reserve lending of BTC?

BTC would have to be recognized as a financial asset by the system for that to happen, otherwise I don't think banks could lend against them.  If they were considered an asset, the banks could buy bitcoins and make loans against them even without "bitbank" software.  Although I was thinking of a cash transfer system, not of fractional reserve lending, which I am not a big fan of as such.  Also, I am not a bankster, just a bitcoin fan! 

[Remember remember the 5th of November]

Open source or not, isn't anything that has to do with banks what Bitcoin is against?

[LaggedOnUser]

Open source or not, isn't anything that has to do with banks what Bitcoin is against?

I wasn't aware that Bitcoin was against banks per se.  The idea for Bitcoin was created as early as 2006 before the banking crisis even started.  Your local bank is still trustworthy even though the Too Big To Fails seem to have gone off the rails.  Also, anyone can open their own bitbank as long as other people trust them to store their coins.

[Terk]

I think it was discussed and many agree that it will happen as a natural next step. I'm not sure about open source banking software though, as real-world banks don't like to use that kind of software. Of course entirely new, bitcoin-only banks might come into existence, but there would be an entirely different game if some real-world banks adopted that and started providing bitcoin banking. Bitcoin would instantly get much better credibility and confidence from general population.

With new banks created by bitcoin entrepreneurs you'll have another problem. These deposits won't be insured as real-world insurance companies won't bother to understand what the company is doing and what are the risks involved. And personally I trust more cold storage wallets that I properly secured on my own than some virtual banking company that came out of the blue. You wouldn't want to put your savings there and get an email from your bitcoin bank one day telling: “Hello, we've been hacked. All funds were stolen. We are ceasing operations and shutting down. kthxbye”.

[Remember remember the 5th of November]

Open source or not, isn't anything that has to do with banks what Bitcoin is against?

I wasn't aware that Bitcoin was against banks per se.  The idea for Bitcoin was created as early as 2006 before the banking crisis even started.  Your local bank is still trustworthy even though the Too Big To Fails seem to have gone off the rails.  Also, anyone can open their own bitbank as long as other people trust them to store their coins.

Well, banks don't like Bitcoin https://bitcointalk.org/index.php?topic=189422.0

[yona]

it's an adapt or cease evolution.
the banking system would be smart to early adapt, but the bottleneck with banking adaption does not have to do with open source software,
it's a tipping point when holding on to the system that feeds them right now won't be worth the profit divided by risk of the new system...
so essentially the bottleneck is brain power

[tutkarz]

Open source or not, isn't anything that has to do with banks what Bitcoin is against?

I wasn't aware that Bitcoin was against banks per se.  The idea for Bitcoin was created as early as 2006 before the banking crisis even started.  Your local bank is still trustworthy even though the Too Big To Fails seem to have gone off the rails.  Also, anyone can open their own bitbank as long as other people trust them to store their coins.

I don't think so holding coins is good idea but banks could still be useful because they could simply allow buying or selling bitcoins throughout them or allow transferring money using bitcoins.

[LaggedOnUser]

I think it was discussed and many agree that it will happen as a natural next step. I'm not sure about open source banking software though, as real-world banks don't like to use that kind of software. Of course entirely new, bitcoin-only banks might come into existence, but there would be an entirely different game if some real-world banks adopted that and started providing bitcoin banking. Bitcoin would instantly get much better credibility and confidence from general population.

With new banks created by bitcoin entrepreneurs you'll have another problem. These deposits won't be insured as real-world insurance companies won't bother to understand what the company is doing and what are the risks involved. And personally I trust more cold storage wallets that I properly secured on my own than some virtual banking company that came out of the blue. You wouldn't want to put your savings there and get an email from your bitcoin bank one day telling: “Hello, we've been hacked. All funds were stolen. We are ceasing operations and shutting down. kthxbye”.

Small banks would probably appreciate the open-source software since they would lack the resources and expertise to develop their own.  Large banks could develop their own custom software if they like.

Cold storage is useful and secure, but it just refers to offline storage of coins.  That's the equivalent of putting your money in a secure vault at home, I think.  While I'm sure this is quite useful, it addresses a somewhat different problem than banking.  On the other hand, in the bitbank proposal, the bank kind of acts like a vault too.  It takes bitcoins out of circulation and instead swaps ledger entries.  In a way, that seems like an even safer way to spend your bitcoins.  It is equivalent to putting your gold (that is, bitcoins) in a vault and using paper money (that is, bitbank ledger entries) to represent them in common usage.  That makes your gold safe in the vault while enabling even more convenient transactions.

I hadn't thought about the insurance problem.  Although of course, none of your bitcoins are insured now, so that is not really a step backward from the present situation.

[LaggedOnUser]

Open source or not, isn't anything that has to do with banks what Bitcoin is against?

I wasn't aware that Bitcoin was against banks per se.  The idea for Bitcoin was created as early as 2006 before the banking crisis even started.  Your local bank is still trustworthy even though the Too Big To Fails seem to have gone off the rails.  Also, anyone can open their own bitbank as long as other people trust them to store their coins.

Well, banks don't like Bitcoin https://bitcointalk.org/index.php?topic=189422.0

I'm sure most banks won't sign up.  The other day I was reading about Netflix and how they tried to form a partnership with Blockbuster for local delivery, and BB just laughed at them.  Now BB is bankrupt!

Anyway, they don't like someone running their own personal bank inside the bank, with potential for anonymous drugs or money laundering going through there, and creating huge amounts of cash transactions with probably little profit for the bank.  With the bitbank, though, you would simply be performing trusted, probably not anonymous transactions with local individuals and businesses.  It is less risky for the bank, thus they have not as much reason to be against it.

[LaggedOnUser]

Open source or not, isn't anything that has to do with banks what Bitcoin is against?

I wasn't aware that Bitcoin was against banks per se.  The idea for Bitcoin was created as early as 2006 before the banking crisis even started.  Your local bank is still trustworthy even though the Too Big To Fails seem to have gone off the rails.  Also, anyone can open their own bitbank as long as other people trust them to store their coins.

I don't think so holding coins is good idea but banks could still be useful because they could simply allow buying or selling bitcoins throughout them or allow transferring money using bitcoins.

I agree that it would be quite useful for banks to act as bitcoin exchanges.  And they might choose to do that instead.  While that would make the Bitcoin system more convenient and stable, it would not make it more efficient, and would not enable instant settlement of transactions, as the bitbank proposal attempts to do.

[TimJBenham]

Your idea sounds a lot like https://bitcointalk.org/index.php?topic=145896.0

[Terk]

Small banks would probably appreciate the open-source software since they would lack the resources and expertise to develop their own.  Large banks could develop their own custom software if they like.

Oh I think they should rather be scared than appreciate. This is others' people money business and they need to have everything as secure as possible. If they don't understand something (because of lack of resources), they won't try to take shortcuts. You have no guaranties with open source software, heck, you are even aware that it was created and is maintained by someone who is not paid to do so. You don't know how secure it is.  You don't know how long it will be maintained and if it won't be abandoned next month. Until the software is mature enough and mainstream enough (think Linux, Apache, etc - this is a pretty small club), you just don't make millions of your customers money depend on it.

Cold storage is useful and secure, but it just refers to offline storage of coins.  That's the equivalent of putting your money in a secure vault at home, I think.  While I'm sure this is quite useful, it addresses a somewhat different problem than banking.

In bitcoin world, I don't need banks to conduct transactions. In real world when you want to send money to someone, you need an intermediary - wether it will be a bank, a Western Union or a postal service where you put cash into an envelope. I don't need a bank for bitcoin transfer. While that off-blockchain ledger might help bitcoin system in overall, it won't help me personally so I have no reason to use banks to transfer my bitcoins and no one will have. Their transaction volume will come from people storing coins with them in the first place and then sending them.

(well, there might be a reason to use off-ledger transfers on day, which is payments; I can imagine number of transactions being so high one day, that you'd need to include 1 BTC fee to be sure that the miners take your transaction within the next few blocks; off-ledger, bank-processed transfers might actually become cheaper one day when it comes to small to mid value transactions)

So I think for now there's storing and securing my coins what's left in terms of reasons why I might want to use a bank instead of taking care of myself. They would need to provide more secure and/or more convenient way to store and use bitcoins for their services to be desired. And that's why I thought about them about secure storage facilities in the first place.

I think that this would be the biggest reason of bitcoin banks existence - secure storage and convenient usage (and easier exchange, but banks wouldn't like to jump into bitcoins to limit themselves to be only money changers). The average Joe is not able to properly secure his bitcoins. Even members of this forum are regularly hacked out of their bitcoins, and they are well above average tech savviness. This is where banks can step up and show people the secure and convenient way of owning and using bitcoins. Also taking responsibility for technical failures. Which leads us to:

I hadn't thought about the insurance problem.  Although of course, none of your bitcoins are insured now, so that is not really a step backward from the present situation.

It is a step backwards if you can properly secure your coins on your own. If there will be a “Hello, we are Bitcoin Xtra Secure Vault Limited, Belize registered, and we just created a bitcoin bank so that you can safely store your bitcoins, we encourage your deposits” bank which came out of the blue, I wouldn't trust them with my savings and I'd prefer my uninsured cold storages over their uninsured not-really-sure-what. As far as I know that bank might be a 3-person operation with more boldness than experience or knowledge.

Now, when it comes to real-world banks, especially the bigger ones, I could trust their IT, their being insured, their being big enough so that an average-sized theft won't have an impact and will be refunded, etc. They are already handling so much money that they know how to do it properly and if they decide to implement a new protocol, I believe they do it right. Until that happens, I am handling my bitcoins on my own.

There is a long road before that might happen, but I believe it's viable in ten years perspective. You might have your BTC, LTC, etc, accounts just next to your USD accounts and they all would use the same banking interface, so you really won't feel much difference. Except knowing that there are no chargebacks for sent coins.

[Welsh]

Even though some Bitcoin users may want it, the majority would not want this to happen, However I believe it's going to happen in the near future if we like it or not. Personally I think it has it's upsides but also has it's down falls which kind of scares we away from this idea.

[LaggedOnUser]

Your idea sounds a lot like https://bitcointalk.org/index.php?topic=145896.0

Ripple does look interesting.  I signed up for their e-mail announcements.

[franky1]

hmm a service that links businesses/exchanges/and other altcoins.....

Ripple.

as for the main purpose of holding your investments. id suggest to everyone DONT THROW ALL YOUR FUNDS into third party services.

fiat banking institutions do not have a problem with bitcoin, neither does fincen or FSA etc. the problem is all of these bitcoin third party services have a problem reading the regulations, following them or atleast paying the licences/insurances to protect peoples investments.

so dont blame banks for shutting down services. blame greedy and lazy exchanges for not caring about looking after their customers and just wanting their profits, and then when getting shutdown for not insuring their customers investments are secure, blaming the banks instead of themselves.

if you want to become a bank atleast get the paperwork down legitimately

[LaggedOnUser]

...
It is a step backwards if you can properly secure your coins on your own. If there will be a “Hello, we are Bitcoin Xtra Secure Vault Limited, Belize registered, and we just created a bitcoin bank so that you can safely store your bitcoins, we encourage your deposits” bank which came out of the blue, I wouldn't trust them with my savings and I'd prefer my uninsured cold storages over their uninsured not-really-sure-what. As far as I know that bank might be a 3-person operation with more boldness than experience or knowledge.
...

Actually, even if 90% of your bitcoins are in cold storage, nothing prevents you from spreading the last 10% over any convenient bitbank.  Each bank would get a few percentage points and you could use them for frequent, minor, transaction-free purchases.  Banks are quite nice for the convenience but you shouldn't store all your money in them.  Even fiat banks get robbed or can have their savings confiscated -- look at Cyprus.

So if the most frequent small purchases are done with a bitbank system, that still involves considerable savings of energy without much additional risk.  Money in cold storage doesn't move around much and is thus not a stress on the network.  It certainly doesn't change the fundamental nature of the bitcoin system.

[LaggedOnUser]

Even though some bitcoin users may want it, the majority would not want this to happen.
However I believe it's going to happen in the near future if we like it or not.
Personally I think it has it's upsides but also has it's down falls which kind of scares we away from this idea.


However I think it 'could' be a very good idea if it's developed well.

Aside from my proposal, what I imagine would happen in the near future is actually a profusion of new, different, specialized banking models with unknown security risks.  Sort of like the altcoin explosion, where everyone is making their own altcoin.  At least with a major bitbank project they can standardize their software and study the risks in detail.

As to whether you would trust them with your bitcoin, normal financial prudence suggests that you not put all your eggs in one basket.  So don't put all your money in Bitcoin (or in any one currency such as the US dollar for that matter), and don't trust all your coins to one bank, regardless of how good their sales pitch is!  That is the diversification principle.