Bitcoin Bank

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Quote from: myrkul

Fractional reserve banking would be MUCH harder to do with bitcoins than physical currency, unless banks were allowed to print paper money "backed" by bitcoins.

I don't understand the need for actual paper. If what you mean by "print paper money" is issue an electronic token representing a bitcoin, I don't think that's difficult to do. It's what does now - it is essentially a full-reserve bank with its own "money."

Quote from: myrkul

Transactions within the bank would also be possible with "fake" bitcoins, especially if all the bitcoins are held in the bank's wallet, and accounts simply have balances.

There are no "fake" bitcoins. There are just bank credits, redeemable for bitcoins by the bank on certain terms, or which can be used for payment or sold to third parties.

A bank could create as much credit as it wanted, or its depositors were prepared to tolerate, but it would quickly go bust if it abused this privilege.

Quote from: myrkul

The problems start hitting hard when you try to send actual bitcoins. If the bank extends itself far enough, and has enough clients, it may be possible wipe out it's coffers with a transaction or two from each client.

True, but that is precisely why successful banks will need to be prudent. The problem with the banking system today is that the risk of failure is mitigated by government support, which creates moral hazard and reckless lending.

Quote from: myrkul

Bottom line, you CAN do fractional reserve banking with bitcoin, but it requires that every other bank and customer agree that your paper or digital notes are as good as the bitcoins they represent, in order to pull it off without any hitches.

It doesn't require that everybody accept the banks' notes, just that there is enough demand for those notes.

They don't have to be "as good as bitcoins" - there's nothing to stop third parties buying up bank notes at a discount to their face value. The risk of the bank collapsing would be priced in.

I agree with you that it's risky - but the market will impose discipline on the banks, to stop them taking excessive risks, remove ones which do, and reward those that don't. Meanwhile depositors will be able to earn interest on their savings, and secure their wallets from theft.


Not disputing anything above. That said:

Quote from: friendsofkim on March 02, 2011, 06:11:01 PM

Meanwhile depositors will be able to earn interest on their savings, and secure their wallets from theft.

You can run a bank that will provide interest on savings and secure wallets from theft with a full reserve. I detailed this elsewhere, and it turns out I was reinventing the wheel.

Quote from: Hal on December 30, 2010, 01:38:40 AM

Actually there is a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.

Bitcoin backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin backed. Interest rates may vary. Cash from some banks may trade at a discount to that from others.

George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.

I believe this will be the ultimate fate of Bitcoin, to be the "high-powered money" that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as... well, as Bitcoin based purchases are today.

May I remark that this posting, made over 5 years ago, was incredibly far-sighted. He describes what we are hoping and working for today.

He did not foresee that second-layer payment systems could still be done in decentralized and anonymous fashion, as in Lightning Network or TumbleBit, but who knows, perhaps even that part of his message will come true if centralized systems that require trust turn out to be trustworthy and reliable enough and cheaper. Perhaps we already have those, like Coinbase or BitPay. I will be happy either way.

Quote from: wobber on December 28, 2010, 02:10:58 PM

Did anyone think at this? How would a bank work? How could you loan bitcoins and get interest for them in an economy with just 21 milion BTC limit?

Did anyone think at this?
No I don't think of it :-\

Did anyone think at this?
Once the bank operate they are already connected on a regulated industry.

How could you loan bitcoins and get interest for them in an economy with just 21 milion BTC limit?
I'm not using any loan program in bitcoin, besides no reason for me to do that things. Because bitcoin already a bank for me.

Quote from: friendsofkim on March 02, 2011, 01:43:50 PM

Fractional reserve banking as occurred during the decentralised "Free Banking" era in the US (1837 - 1864) - i.e. subject to proper competition and where the risks are assumed by those entering into contracts with each other, not third parties - is healthy and desirable. During the Free Banking era, bank notes were not enforceable tender, and often traded at a discount against Federal notes the further they traveled from the issuing bank

You forget to add a few ugly things

For example, that the average life span of a bank during this "Free Banking era " in the US was around 3 years (if my memory serves me correct). Surely not a good thing, by any means. Further, since gold was used as money back then, to deal directly with it was not very handy, so people used depositary receipts they received when they put their gold into such banks. Obviously, banks ended up issuing more receipts than they had gold in their vaults, which inevitably led to bank runs and chain bank bankruptcies (the word bankruptcy itself seems to stem from banks, which is not surprising). Just in case, today's monetary systems have nothing to do with FRB


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