There is a need for a Bitcoin Bank

First off, note how I didn't say central bank. When I say that a Bitcoin Bank may be needed, I'm simply saying it may be best for the currency if somebody started one. I'm not implying that the actual Bitcoin protocol should change, except perhaps where necessary to allow greater transparency. Again, Bitcoin itself should remain entirely neutral, otherwise it will be destroyed. I'm im simply implying that business that make use of Bitcoin could perhaps improve the currency - and thus their business - by forming such a bank.

By Bitcoin bank, I mean an institution, controlling a range of primarily debt-based assets, whose purpose is to provide liquidity while ensuring greater stability, both in exchange rates, and interest rates. One problem with Bitcoin at the present is that, although clearly it has time value, it is extremely difficult to invest said Bitcoins without taking on a huge amount of risk. The reason for this is largely due to an inefficient Bitcoin credit market. Bitfinex is a great example of something that, with a little work, could become such a bank.

The first step is creating an actual margin credit market. Bitfinex's margin credit market is problematic since the debt is not transferable. In a true margin credit market, new margin loans would not be any different than existing ones. When somebody wishes to borrow Bitcoins, they would simply issue a security backed by the value in their account. The security would have an amount, limit, and time-span attached to it, and should be sold, just as it is now, on a free market. The important improvement would be that these securities could then be re-sold, on the same market, to new buyers, indistinguishable from freshly-issued securities. This allows much greater liquidity in general since buyers can opt for early withdrawl of their money by re-selling their security.

The second step would be to make borrowed funds indistinguishable from other funds (except obviously for the purpose of restricting withdraws form the account). This means that those that borrow USD, to leveraged-buy Bitcoin, can then re-lend those Bitcoin for a lesser period, earning some interest, and improving the credit market as a whole by providing more demand & supply on both sides.

With the resulting improvements to liquidity, many of the inefficiencies associated with the actual Bitcoin exchange market would be resolved as well. Suddenly, arbitrage is no longer as big an issue with the time delay associated with moving money from exchange to exchange because, in the interim, leverage can be employed to maintain a net-0 exposure to fiat (or BTC) value. This makes exchange rate less dependent on any given exchange, improving stability. Not to mention the fact that people would actually be able to generate a stable return by lending BTC at minimal risk, which would increase demand for Bitcoin.