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Author Topic: The Vault (Non-Fractional Reserve BTC Banking)  (Read 2281 times)
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June 26, 2011, 07:32:36 AM
 #1

The Vault
A Bank, but not the type you're used to - In the tradition of the first banks (goldsmiths),  The Vault would be entirely focused on security, with an emphasis on ease of access to funds securely and remotely, and would have two types of accounts available

1) Daily Account - Person deposits their bitcoins, pays perhaps a 0.5% annual fee, and in exchange for that The Vault secures and insures them, keeping the specific bitcoins that person lent in a secure and heavily encrypted location.  You might get a physical card, or a QR code, or you could do something cute like have an app that integrates with your browser like secure keychain software does, except this facilitates secure remote payments from your vault wallet.   Basically, you pay them a small fee to guard your BTC.  If you are robbed, the vault is on the hook and reimburses you from reserves kept for that purpose.  This should all be transparent.

2) Timed Deposit Accounts - This is basically you making a loan to the bank where you give them say 100 bitcoins and agree to not withdraw them for 30, 90 days or longer, and in exchange the bank pays you a rate of return relative to the amount of time the deposit is for (1 month - 2% 3, month 5%, 6 month 7% etc.), the bank then looks at various projects and people who need loans, determines which ones are benificial and have a good chance of succeeding and therefore paying back the loan, and they loan at slightly higher interest than they pay the depositor (the spread depends on alot of things, but there is plenty of profit to be made without gouging)  Interest rates would be higher than people are used to now, but the environment of slow deflation makes the money earned when the project is completed worth more than the money borrowed to start the project in the first place, and with the ability to participate in a stable environment means growth and prosperity all around.

In a nutshell, this model focuses on safety and stability above all things, and notably is the only way you can set up a bank in such a way to not follow the practices of fractional reserve lending, which are the downfall of fiat money over and over and over again throughout history.

So would you use The Vault?

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June 26, 2011, 07:43:42 AM
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So would you use The Vault?

Yes

Just to store my bitcoins securely.

I think this is the next major step for Bitcoin as a whole, getting a Vault established that is as secure technically and trustworthily as an existing bank account.

This will make someone a lot of money.
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June 26, 2011, 07:47:36 AM
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I can see the security being a selling point, as I can't see the masses being technically savvy enough to secure their own wallets at the moment.

I don't see certificates of deposit and loans being viable though.


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June 26, 2011, 07:49:50 AM
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I can see the security being a selling point, as I can't see the masses being technically savvy enough to secure their own wallets at the moment.

I don't see certificates of deposit and loans being viable though.



What do you see as the problems with loans/timed deposits?

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June 26, 2011, 07:55:06 AM
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I would use all of those services, and even more so if you don't bother to secure my specific bitcoins. Mixing bitcoins is good.

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June 26, 2011, 07:58:04 AM
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So  instead of specific "boxes" where your specific BTC are stored, you'd rather have them stored in larger pools, where the total amount of BTC is always at least equal to the amount of outstanding deposits (100% backed)?

Are you interested in mixing BTC for anonimity?  or is there a technical advantage I've not noticed?

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June 26, 2011, 08:00:47 AM
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The biggest problem I have, and I hate to say it, but there is no government agency to guarantee the deposit so there is the very real chance that if the bank makes too many bad loans they will go under and lose the depositor's money.  Even if you can get the loans done in the proper legal form, which I'm not sure of at the moment, then you have the issue of what happens when the value of bitcoins doubles or triples in a few months?  Everyone who borrowed money will now owe two or three times as much, and most will not be able to pay the loan back.  So the bank loses out big time on bitcoin appreciation, but on the other hand if the value halves the bank doesn't get any benefit.  It only helps the borrower since the bank is only making a profit off the spread in interest between what is charged to the borrower and what is paid to the depositor.  So the bank loses when bitcoin goes up, but fails to gain when it goes down.

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June 26, 2011, 08:02:02 AM
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No...

The main reason is why should I trust someone else's security over my own? If anything, putting bitcoins into a centralized service would make my coins even more at risk to be stolen. It's like setting a treasure chest out in the middle of a room and saying "It's okay! It's locked!". Offering "insurance" directly would be circular reasoning. "I assure you the money is safe, but if it is not safe I will give you the money". What if someone hacked 'The Vault' and stole EVERYONE'S coins? Or in other terms, Got Goxed? There would have to be a much much much more compelling reason for me to use 'The Vault' than attempting to keep my wallet safe on my behalf. No one is going to care more about my money than I do.

Point #2 won't work because no one would ever pay you back. You give me a 1000 bitcoin loan and I disappear. Then what? Even if you attempt to verify my identity, and let's just assume I actually provided my true identity, I could easily live in some remote country where you would have no hope of ever prosecuting me. You'd probably even get laughed at in the US at this point.

But let's assume people did pay you back. It still wouldn't work because real banks already offer the same exact thing, called Certificate of Deposits, except there is still always a way to get your money back for penalty before the fixed time expires if you need to. I seriously doubt a lot of people will agree to lock up coins for 90 days with no hope of getting them out sooner if they need to. For example, I buy 100 @ $15USD. Price shoots to $30USD. 5% in 4 more months from 'The Vault' ain't looking too hot to me right now. If you gave people the option the break these terms, you become a fractional reserve bank. But let's face it, centralized bitcoin "banking" is way way far off... if ever.

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June 26, 2011, 08:12:16 AM
 #9

So  instead of specific "boxes" where your specific BTC are stored, you'd rather have them stored in larger pools, where the total amount of BTC is always at least equal to the amount of outstanding deposits (100% backed)?

Are you interested in mixing BTC for anonimity?  or is there a technical advantage I've not noticed?

Well, there is the anonymity benefit, and that is the main reason I'm interested in it, but there's also the technical benefit of being able to send bitcoins from one account at the bank to another without paying transaction fees. In addition, since you aren't actually moving bitcoins, you can act as an escrow between two accounts.

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June 26, 2011, 08:16:08 AM
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The biggest problem I have, and I hate to say it, but there is no government agency to guarantee the deposit so there is the very real chance that if the bank makes too many bad loans they will go under and lose the depositor's money.  Even if you can get the loans done in the proper legal form, which I'm not sure of at the moment, then you have the issue of what happens when the value of bitcoins doubles or triples in a few months?  Everyone who borrowed money will now owe two or three times as much, and most will not be able to pay the loan back.  So the bank loses out big time on bitcoin appreciation, but on the other hand if the value halves the bank doesn't get any benefit.  It only helps the borrower since the bank is only making a profit off the spread in interest between what is charged to the borrower and what is paid to the depositor.  So the bank loses when bitcoin goes up, but fails to gain when it goes down.

Governments don't guarantee deposits, the taxpayers do.  Take a look at the bill the FDIC (Federal Deposit Insurance Corporation) has racked up so far this year on the US taxpayers behalf, it's more than 8 billion in the red.

This actually does have a solution - The bank doesn't make bad loans, because nobody is there to save it so it uses actual risk management rather than the mickey mouse parade you see in financials today.   Theres no law saying banks have to loan money to people who probably won't pay it back, that only happens precisely because we have things like mandatory deposit insurance through the FDIC.

And if The Vault (like any bank) ever started making bad loans and losing money, people would stop making timed deposits with them.   But even if that happened, the people with daily accounts would be completely unaffected by this (again this relies on transparency, which would need to be built into the concept)

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June 26, 2011, 08:23:36 AM
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I would go for a Daily account, as long as the "Vault" and the "Bank" were separate entities (look at what GoldMoney does). One should not know what the other is doing. This way, a "Mtgoxing" incident on the bank would cause no harm absolutely to the funds, although it would create a temporary publicity problem for the bank. The Vault should be liable to the bank for the security of the funds, and if something bad happens to the Vault (which should NOT happen in the first place - there is enough paranoid security advice here which applies in this case), the Vault should be legally bound to reimburse the bank for all losses in full.

The Timed Deposit Accounts seem to created an interest for the Bank to try to manipulate the price of Bitcoins lower.

Example:
  • Customers deposit 10K BTC for a 30 day period.
  • Bank sells those 10K BTC on the market when it finds that there is little depth on the bid side, so that the price will drop more than the percentage of the transaction fees.
  • Price moves lower.
  • Bank immediately places a bid to buy back those 10K BTCs on the market which, having moved lower, has most probably created selling pressure with relatively large sell orders appearing at lower and lower prices.
  • Repeat as many times as possible within the 30 day period.
 

Or just create a trading bot which would do this much more efficiently. That's what I would (be tempted to) do anyway.  Wink

I must say that you seem to be honest with this, but the possibility of such a manipulation happening is not really far fetched, or is it?

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June 26, 2011, 08:24:26 AM
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The biggest problem I have, and I hate to say it, but there is no government agency to guarantee the deposit so there is the very real chance that if the bank makes too many bad loans they will go under and lose the depositor's money.  Even if you can get the loans done in the proper legal form, which I'm not sure of at the moment, then you have the issue of what happens when the value of bitcoins doubles or triples in a few months?  Everyone who borrowed money will now owe two or three times as much, and most will not be able to pay the loan back.  So the bank loses out big time on bitcoin appreciation, but on the other hand if the value halves the bank doesn't get any benefit.  It only helps the borrower since the bank is only making a profit off the spread in interest between what is charged to the borrower and what is paid to the depositor.  So the bank loses when bitcoin goes up, but fails to gain when it goes down.

Governments don't guarantee deposits, the taxpayers do.  Take a look at the bill the FDIC (Federal Deposit Insurance Corporation) has racked up so far this year on the US taxpayers behalf, it's more than 8 billion in the red.

This actually does have a solution - The bank doesn't make bad loans, because nobody is there to save it so it uses actual risk management rather than the mickey mouse parade you see in financials today.   Theres no law saying banks have to loan money to people who probably won't pay it back, that only happens precisely because we have things like mandatory deposit insurance through the FDIC.

And if The Vault (like any bank) ever started making bad loans and losing money, people would stop making timed deposits with them.   But even if that happened, the people with daily accounts would be completely unaffected by this (again this relies on transparency, which would need to be built into the concept)

That's not really my point.  It seems like any loan made in bitcoins is inherently more risky because in addition to the normal risks of default you also have the chance that the principal could effectively increase by a huge amount, so that even if it were a good loan at the time it might turn south really quickly.  The bank loses out big time when the value of bitcoins skyrockets because there will definitely be some people who cannot pay back their loans in a currency that has appreciated much faster than whatever they used the loan for.

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June 26, 2011, 08:39:55 AM
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I would go for a Daily account, as long as the "Vault" and the "Bank" were separate entities (look at what GoldMoney does). One should not know what the other is doing. This way, a "Mtgoxing" incident on the bank would cause no harm absolutely to the funds, although it would create a temporary publicity problem for the bank. The Vault should be liable to the bank for the security of the funds, and if something bad happens to the Vault (which should NOT happen in the first place - there is enough paranoid security advice here which applies in this case), the Vault should be legally bound to reimburse the bank for all losses in full.

The Timed Deposit Accounts seem to created an interest for the Bank to try to manipulate the price of Bitcoins lower.

Example:
  • Customers deposit 10K BTC for a 30 day period.
  • Bank sells those 10K BTC on the market when it finds that there is little depth on the bid side, so that the price will drop more than the percentage of the transaction fees.
  • Price moves lower.
  • Bank immediately places a bid to buy back those 10K BTCs on the market which, having moved lower, has most probably created selling pressure with relatively large sell orders appearing at lower and lower prices.
  • Repeat as many times as possible within the 30 day period.
 

Or just create a trading bot which would do this much more efficiently. That's what I would (be tempted to) do anyway.  Wink

I must say that you seem to be honest with this, but the possibility of such a manipulation happening is not really far fetched, or is it?

Well the question is, what is the bank allowed to do with timed deposits?  You're assuming they would be free to invest said money in any way possible, but I had envisioned a specific focus on economically targeted loans (i.e. loans intended to enable creation).   Again, since this is 1:1 backing:loan the scope of this business would be much smaller than you see in commercial banks today, who are often leveraged 40:1, and during the peak of the financial idiot-fest saw leverage in the range of 140:1.

With a limited supply of BTC for loaning out, it makes sense to target specific financial uses - Really what I'm talking about here is a souped up credit union that acts for the benefit of its members, rather than viewing them as potential profit.

Regarding the manipulation - That is true of any major concentration of currency be it a bank, a company that transacts alot in BTC, or even an early adopter who bought thousands when they were .01/ea.   We only have these wild swings because the market is so freaking new, once it gets easier to get your money into and out of the markets, and they become a little more obviously secure you'll see things start to smooth out as people get used to the system and take advantage of arbitrage opportunities, which reduces pricing spreads. 

Beyond all of that though, the spirit by which such a venture is run is very very important.  Any time you have a concentration of "money", you have risk of pretty gnarly evils, so the corporate charter for such an organization would be designed to restrain the beast from all things but those it is intended to do.  Mission creep is the problem, but it can be avoided if that is your goal.

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June 26, 2011, 08:40:17 AM
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I might use it if it had extremely good physical security. Like CyberBunker, but devoted to the bank. Physical security is the only thing I can't do -- I have encryption and backups handled.

I've been thinking recently about the interesting security measures such a bank could use. It'd be really fun to build it.

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June 26, 2011, 08:41:18 AM
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I might use it if it had extremely good physical security. Like CyberBunker, but devoted to the bank. Physical security is the only thing I can't do -- I have encryption and backups handled.

Yes, this would be a secure location as well.

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June 26, 2011, 08:45:49 AM
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The biggest problem I have, and I hate to say it, but there is no government agency to guarantee the deposit so there is the very real chance that if the bank makes too many bad loans they will go under and lose the depositor's money.  Even if you can get the loans done in the proper legal form, which I'm not sure of at the moment, then you have the issue of what happens when the value of bitcoins doubles or triples in a few months?  Everyone who borrowed money will now owe two or three times as much, and most will not be able to pay the loan back.  So the bank loses out big time on bitcoin appreciation, but on the other hand if the value halves the bank doesn't get any benefit.  It only helps the borrower since the bank is only making a profit off the spread in interest between what is charged to the borrower and what is paid to the depositor.  So the bank loses when bitcoin goes up, but fails to gain when it goes down.

Governments don't guarantee deposits, the taxpayers do.  Take a look at the bill the FDIC (Federal Deposit Insurance Corporation) has racked up so far this year on the US taxpayers behalf, it's more than 8 billion in the red.

This actually does have a solution - The bank doesn't make bad loans, because nobody is there to save it so it uses actual risk management rather than the mickey mouse parade you see in financials today.   Theres no law saying banks have to loan money to people who probably won't pay it back, that only happens precisely because we have things like mandatory deposit insurance through the FDIC.

And if The Vault (like any bank) ever started making bad loans and losing money, people would stop making timed deposits with them.   But even if that happened, the people with daily accounts would be completely unaffected by this (again this relies on transparency, which would need to be built into the concept)

That's not really my point.  It seems like any loan made in bitcoins is inherently more risky because in addition to the normal risks of default you also have the chance that the principal could effectively increase by a huge amount, so that even if it were a good loan at the time it might turn south really quickly.  The bank loses out big time when the value of bitcoins skyrockets because there will definitely be some people who cannot pay back their loans in a currency that has appreciated much faster than whatever they used the loan for.
I know it seems like the BTC market is just volitile by nature, but it won't always be that way - The characteristics of BTC mean that we will eventually find ourselves in a state of equilibrium with a hint of deflationary pressure (assuming there isn't complete abandonment, in which case the currency has failed so all bets are off)  The other thing you're confused about is "losses" because of changes in value - You are assuming that value is denominated in US Dollars, but that was not always so and likely will not be for much longer.  BTC will eventually be valued as BTC, and the US dollar will fluctuate in value against it.  (In fact, that's already partly what's happening, it's just that nobody looks at it like that yet)

But the reality is that you can already buy some services and goods for BitCoins, and in the future you will be able to buy EVERYTHING for bitcoins, with no tie to the USD beyond people spending USD to buy BTC

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June 26, 2011, 08:53:58 AM
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That's not really my point.  It seems like any loan made in bitcoins is inherently more risky because in addition to the normal risks of default you also have the chance that the principal could effectively increase by a huge amount, so that even if it were a good loan at the time it might turn south really quickly.  The bank loses out big time when the value of bitcoins skyrockets because there will definitely be some people who cannot pay back their loans in a currency that has appreciated much faster than whatever they used the loan for.
For at least the near future, the only way to pay reliable interest on deposits in bitcoins is if you have a supply of people who wish to take a short position on bitcoins. Otherwise, the risk is unmanageable.

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June 26, 2011, 09:11:22 AM
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That's not really my point.  It seems like any loan made in bitcoins is inherently more risky because in addition to the normal risks of default you also have the chance that the principal could effectively increase by a huge amount, so that even if it were a good loan at the time it might turn south really quickly.  The bank loses out big time when the value of bitcoins skyrockets because there will definitely be some people who cannot pay back their loans in a currency that has appreciated much faster than whatever they used the loan for.
For at least the near future, the only way to pay reliable interest on deposits in bitcoins is if you have a supply of people who wish to take a short position on bitcoins. Otherwise, the risk is unmanageable.

I'd imagine you would start the Vault portion of it ASAP as the security is a pressing issue now, and focus on Time Deposits once things settle.

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June 26, 2011, 09:21:05 AM
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I would put some fraction of my coins in a thing like this. I think I have good security, but there is no reason for all my btc eggs to be in one basket, maybe I've overlooked something after all.

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June 26, 2011, 09:56:11 AM
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I think the current banking system has it all wrong, combining safeguarding money with speculating in investments. I believe a bitcoin vault should specialize on security and possibly payment services, timelock services, some kind of escrow, stuff like that. You can always invest somewhere else. Why would you want to put your money in an entity that could go broke on bad investments?

I also like Gavin's idea a lot: http://forum.bitcoin.org/index.php?topic=19080.msg267432#msg267432

A vault that does not own your coins. You have two security devices, an every day one, and a master key that you put in a safe deposit box and is only used if the vault service is compromised. In every day use, you use your regular device and send transactions via the vault service. To sign bitcoin transactions you need 2 out of 3 of: every day security device, vault service, emergency security device. This means that the vault service can't spend any of your money, but they can make sure that if anybody gets your every day device, they can only spend a maximum amount per day that you set ahead of time. In order to lose all of your money, you have to lose both your security device and your emergency device.

This service can be made even more secure against loss, by adding in a timed transaction. The vault can set things up so that if you don't refresh your coins, say once a month, they will be sent to the vault service's private account. That way they never hold anybody's money, but if you lose both secure devices, the money will be recovered and they can send you new devices that will control it.

This has some great advantages: (1) You don't have to trust the service, (2) It's easy enough for the average person to actually use safely, (3) It can probably avoid all of the regulatory issues of being lumped in as a financial service or bank, it's just data security.


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