Is Fractional Reserve banking possible with Bitcoin?

[toddfletcher]

Hello,

My thought is this: since fractional reserve banking basically creates money out of nothing, wouldn't it be impossible to have such a system based on bitcoin? If so, how would this effect bitcoin's potential as a global reserve currency (if it indeed has any)?

(I've been a lurker here since April, and I've found these forums invaluable for understanding this great new mystery that is bitcoin. Some very smart people around here)

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[ralree]

Yes, this has been discussed before.  Try the search feature - I think you'll find what you're looking for.

Example from doing this: https://bitcointalk.org/index.php?topic=22553.0

[pedrog]

It is possible with off-chain transactions, it wont affect bitcoin value, but the "business" will crash when a "bank run" occurs...

[theonewhowaskazu]

Clearly, it is possible. Whether it will actually happen, though, I don't know.

I wouldn't be surprised to see most people start to use off chain transactions, which increases the chances of it happening by a ton. Already, places like Gox/Bitstamp could engage in such practices easily.

[oleganza]

Fractional reserve banking started because gold and silver were not useful as a currency in an emerging economy (too expensive to divide and transfer). So gold ("money") was stored in banks and their receipts were used instead as a "currency". Banks were constantly lending out more receipts than they have gold and ultimately, took over the government to legalize the procedure. Then, the gold was almost outlawed as money (see 1933 confiscation decree by Roosevelt) and finally Nixon ditched any gold obligations from under USD.

Bitcoin is not only money (like gold), but also currency (like USD bills). When there will be efficient standalone wallets and vault apps and devices, people wouldn't need banks and wouldn't need money substitutes (bank promises). Therefore, discussing fractional or full "reserve" would be irrelevant. There simply won't be currency that needs to be "backed" by anything.

In certain cases of some clearing houses or networks, there will be some IOUs, but those would be automatically redeemed on regular basis without any emerging risk of bank run. Those IOUs will only be useful as means for micropayments or frequent payments. Since Bitcoin encourages savings, demand for credit would be much smaller and certainly not in realm of micropayments, so even small fraud in these clearing mechanisms won't be even viable.

[al.matic]

In order to have fractional reserve banking people must save money in bank accounts. To make people do that you must make their money worth less and less by printing more and more. So people are happy to be able to save money, with interest rate a little below inflation.  No inflation - no need to save bitcoins in a bank (unless the bank is paying you interest above inflation, loosing money, or convince people somehow to give them their money).

[theonewhowaskazu]

In order to have fractional reserve banking people must save money in bank accounts. To make people do that you must make their money worth less and less by printing more and more. So people are happy to be able to save money, with interest rate a little below inflation.  No inflation - no need to save bitcoins in a bank (unless the bank is paying you interest above inflation, loosing money, or convince people somehow to give them their money).

clearly bitcoin banks would have to pay you interest, and/or provide features like exchange, off-chain transfer, etc... in order to get people to lend them money.

[blub]

I'm pretty sure it will happen, and as in the current situation you can store your money on a bank and trust them, or store it under you bed(in your own wallet) and trust yourself to keep it safe. Interest in Bitcoin might appear, as the banks can lend the bitcoins, or the banks charge some amout for the service of handling your bitcoins. Depends on supply and demand.

maybee all the feature a bank has to offer in order to attract deposits is "we have never been hacked"

[Jabbatheslutt]

I doubt banks would take interest in bitcoins unless they control the majority.

[johnyj]

A storage service is quite practical, but loaning out bitcoin is very unlikely, since there is a high probability that the borrower will never be able to payback the loan (due to fast rise in bitcoin value)

[fattypig]

Well, they don't need to pay it with USD, they just confiscate those big player and they got a pile of them for free.

[davidgdg]

It's possible but unlikely to happen on a significant scale. When a bank lends money the borrower doesnt usually take cash. Instead he gets bank credit. Since the ability of banks to create bank credit is almost unlimited (with central banks watching their back), voila you get FRB. But if I borrow Bitcoins from a bank I won't want bank credit. I will want the actual BTC. So there is no scope in that scenario for FRB.

[al.matic]

When a bank lends money the borrower doesnt usually take cash. Instead he gets bank credit.

You can take the cash. But the more cash you hold, more value you loose by not earning any interest. So eventually cash finds its way back to to the banks, and cycle starts again.

[toddfletcher]

It is possible with off-chain transactions, it wont affect bitcoin value, but the "business" will crash when a "bank run" occurs...

I think this is the answer I was looking for. So in essence the bank would be issuing IOUs redeemable for bitcoin, not bitcoins themselves, is that correct? Analogous to how gold was used prior to 1971?

[toddfletcher]

Yes, this has been discussed before.  Try the search feature - I think you'll find what you're looking for.

Example from doing this: https://bitcointalk.org/index.php?topic=22553.0

Thanks

[qwk]

My thought is this: since fractional reserve banking basically creates money out of nothing,

It does not create money "out of nothing". Repeating the same false statement over and over again does not make it true.
The money that's finally created during the process of lending is created out of the opportunity value of the lent money.

wouldn't it be impossible to have such a system based on bitcoin?

No. In fact, as we speak, it's already happening and it has for quite a few years. It doesn't happen on a large scale, yet, though.

There will be a time when it starts to "get out of hand", though, and that will be when bitcoin is adopted by payment processors like e.g. paypal.
Imagine the scenario where paypal starts embracing bitcoin.
They won't require their users to transfer bitcoins into the paypal system before they can use it, but will rather make it possible for all their users at once to just use bitcoin like any other currency. I.e., you have a paypal account and want to buy something that's priced in bitcoins, paypal does the currency exchange for you and off you go. They will need a large stash of coins to do so but it will nowhere be near a 100% reserve for all their users' holdings.
Paypal is just an example here. The same would apply if banks let customers have accounts in bitcoins or with credit card companies, etc. pp., you get the idea.

If so, how would this effect bitcoin's potential as a global reserve currency (if it indeed has any)?

It doesn't. In fact, for a reserve currency, the same rules apply as for any other currency, so I don't see where there could be any problem.
Bitcoin could make a good reserve currency because its monetary base is directly electronically transferrable, which is not the case for e.g. the Dollar or the Euro.

[Miz4r]

My thought is this: since fractional reserve banking basically creates money out of nothing,

It does not create money "out of nothing". Repeating the same false statement over and over again does not make it true.
The money that's finally created during the process of lending is created out of the opportunity value of the lent money.

And you repeating the same nonsense over and over again doesn't make it true either. What's the opportunity value of a $300,000 mortgage? The house increasing in value I would guess would be your answer. Okay, but do you think that can go on forever? Looking at recent history, nope it can't even though the banks thought they could inflate the bubble endlessly. So opportunity value is just an empty term you just made up and is still 'nothing'. It's something you expect to be valued more in the future (or produce more value), and when it doesn't well that's too bad the normal population suffers and bankers are bailed out by more debt. So the money is still in essence being created out of nothing and then lent out, it's an evil scheme especially if you consider the macroeconomic consequences and I'm sure you know that already. If not you should get your head out of the sand and look around.

[imrer]

Of course it's possible. Question should be if that's something what market is asking for. It may occur in the future but I don't think we're heading that way.

[steelhouse]

* You have 300 BTC and deposit it in a bitcoin bank
* they keep 30 on reserve and loan out 270 BTC
* this 270 ends up at another BTC bank
* they keep 27 and loan out the rest, ...

There will be fractional reserve banking.  However, the point is you don't have to participate.  Everyone has their own bank, their bitcoin account.  The idea the economy needs debt to function is just propaganda of the debtors, politicians, and banks.  Apple Computer and hundreds of other companies grew at 30% per year with no debt.   In fact the country would be much better off with no debt.  Imagine if CCMO was not able to deduct debt interest?  This is one of those fraudulent private equity debt transactions.  They load it up with debt and then since debt is repaid before corporate income tax it is beneficial to them as the total debt repayment is less than the inflation rate.  CCMO use to pay taxes to the government, as result of Bain adding debt they now receive tax money.  If their depreciation deductions stops they go broke.  However, if they had no debt they would be paying massive taxes and dividends to shareholders.

If you want to loan money to someone else do it.  I don't need a semi-retarded banker to loan my BTC to his buddies and be forced to bail him out when the bank ultimately crumbles.  I don't need auditors give phoney assessments to houses so people can pull money out of them.

In summary there is no fdic bailouts, no fed talp or tarp BS, no 0% discount indow loans to their banking buddies.  Thus, if you give you hard earned BTC to a bank, like pirate passthrough bonds, goodluck with your investment.  BTW, you will earn far more real value in your BTC account than any bank has paid in the last 50 years.  To put money in a bank today loses money a 5% annually.  If you want to make aloan, why not start with a bond or equity investment?

Warren Buffett has little money in bank accounts or treasury bonds why?  Because the are crap investments!

[Zarathustra]

* You have 300 BTC and deposit it in a bitcoin bank
* they keep 30 on reserve and loan out 270 BTC
* this 270 ends up at another BTC bank
* they keep 27 and loan out the rest, ...

There will be fractional reserve banking.  However, the point is you don't have to participate.  Everyone has their own bank, their bitcoin account.  The idea the economy needs debt to function is just propaganda of the debtors, politicians, and banks.

No, that's History. No debt, no economy, no labor division, no collectivism. Instead of that, you'll find self-sufficiency of self-sufficient communities beyond any business, state and debt.

In fact the country would be much better off with no debt. 

Yes, but no debt means no money, no economy, no business: self-sufficiency!