Banks are fundamentally unnecessary and actually dangerous for bitcoin

[qwk]

Banks are unnecessary for bitcoin. You do not gain anything by giving someone else responsibility for your money.

Depending on your need, you might actually gain a lot. Online wallets or banks could offer a lot of services, the regular bitcoin client doesn't offer.

• instant transfers between users of the same service
  
  • zero fees or low fees for internal transfers
  • micropayments which are too expensive over the bitcoin network
  • possibility of chargebacks (yes, some people may actually want that)
• insurance against theft / technical failure
• portability across devices
• interest (which could require fractional reserve, but some people may be willing to accept that)
• merchant services
• currency exchange
• etc. etc.

I don't say you should use a bitcoin bank, but i see a lot of good reasons to do so. Whether or not these additional services are valuable enough for you to accept the downsides of banking, is totally up to you.

(Note that I am not arguing you should never store any of your money in online services. Just that you should only store small quantities that are as small as your level of trust for those services. If they ever have most of your bitcoins, then you are probably making a mistake.)

100% agreed on the "level of trust", but that doesn't necessarily mean small amounts. With a secure bank including insurance, i see no reason not to actually store almost all my bitcoins with them.

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[harm]

I like your points JoelKatz and qwk,

now I just see a problem in the thematic of charging interest, which is quite a twist...:-/

Generally it is an economic and reasonable method for me to participate in growth (opportunity savings) when my bank offers credits for people or businesses willing to pay back interest.

But where does the money to pay the interst come from?
In the end it is all about the time someone spends in earning the same amount of money someone else earnes.
One could ask how fair is it to have one person working 10 h a day, while an other one needs 8 h only to earn the same amount of money? But that is another question... So far this is how it works and i think it is a good way, as probably one had to do some effort to achieve that balance.

I am getting to the sens and the right to charge interest. So to work out the interest someone has to pay he works more hours a day.

But the big problem is the money creation; fractional reserve banking!!
http://en.wikipedia.org/wiki/Fractional_reserve_banking
Which means credit users have to work more hours a day to pay the interest on money, that does not even exist!! Also the paid interest receive the banks, not the peoble putting money on their bank account! So here I see the potenial in a fair currency in bitcoins.

But, well, on the other side, without that created money we would not have been able to grow that fast in the past years...

And again a downside of interest: the poor pay the rich!! Only rich people can gain opportunity savings, as to receive at least 2% you need to have quite an amount of money these says;) And how needs that money? The poor people ask for credits and therefore pay the interest to the rich. Also companies goning in debt do their costcalculation inlcuding the interest they have to pay back. So in the end everyone buying that companies products also pays his interest debt.

[payb.tc]

And again a downside of interest: the poor pay the rich!!

i don't see how you can call that a downside unless you are at the same time claiming to be poor.

Poor man: That's a downside!
Rich man: That's an upside!

seems quite neutral to me.

[JoelKatz]

But where does the money to pay the interst come from?

From the opportunity value. Ten dollars today is worth more than ten dollars tomorrow because everything you can do with ten dollars tomorrow you can do with ten dollars today plus you can spend it before tomorrow. When you loan money, you transfer the money from someone who has no way to extract the opportunity value to someone who can and they split the surplus.

In the end it is all about the time someone spends in earning the same amount of money someone else earnes.
One could ask how fair is it to have one person working 10 h a day, while an other one needs 8 h only to earn the same amount of money? But that is another question.

You could also ask why it would be fair that one person produces more value than another and gets the same pay.

I am getting to the sens and the right to charge interest. So to work out the interest someone has to pay he works more hours a day.

No, not at all.

Say you work as a laborer. Your work sucks, it's hard work in the hot Sun. You get offered a job as a pizza delivery driver. You have air conditioning, you get paid more. But you don't have a car and you need one to work as a driver. You could spend the next few months living on even less to save up enough money to buy a car, but that makes no sense. Instead, you borrow the money to buy the car. You pay the interest out of the value of the car which enables you to get a better job.

But the big problem is the money creation; fractional reserve banking!!
http://en.wikipedia.org/wiki/Fractional_reserve_banking
Which means credit users have to work more hours a day to pay the interest on money, that does not even exist!! Also the paid interest receive the banks, not the peoble putting money on their bank account!

No, it doesn't mean they have to work more hours a day to pay the interest on money unless they take unwise loans. If, for example, you borrow money that allows you to get a better job, you may work fewer hours. Don't blame wasteful consumption on bankers.

[harm]

And again a downside of interest: the poor pay the rich!!

i don't see how you can call that a downside unless you are at the same time claiming to be poor.

Poor man: That's a downside!
Rich man: That's an upside!

seems quite neutral to me.

I don't exactly know what you mean?!
What I am saying: the rich get richer, the poor get poorer. The poor pay the interest the rich receive...

[payb.tc]

And again a downside of interest: the poor pay the rich!!

i don't see how you can call that a downside unless you are at the same time claiming to be poor.

Poor man: That's a downside!
Rich man: That's an upside!

seems quite neutral to me.

I don't exactly know what you mean?!
What I am saying: the rich get richer, the poor get poorer. The poor pay the interest the rich receive...

and how is that a downside? that's all i'm asking.

seems to me if you're rich that's an upside.

[harm]

But where does the money to pay the interst come from?

From the opportunity value. Ten dollars today is worth more than ten dollars tomorrow because everything you can do with ten dollars tomorrow you can do with ten dollars today plus you can spend it before tomorrow. When you loan money, you transfer the money from someone who has no way to extract the opportunity value to someone who can and they split the surplus.

In the end it is all about the time someone spends in earning the same amount of money someone else earnes.
One could ask how fair is it to have one person working 10 h a day, while an other one needs 8 h only to earn the same amount of money? But that is another question.

You could also ask why it would be fair that one person produces more value than another and gets the same pay.

I am getting to the sens and the right to charge interest. So to work out the interest someone has to pay he works more hours a day.

No, not at all.

Say you work as a laborer. Your work sucks, it's hard work in the hot Sun. You get offered a job as a pizza delivery driver. You have air conditioning, you get paid more. But you don't have a car and you need one to work as a driver. You could spend the next few months living on even less to save up enough money to buy a car, but that makes no sense. Instead, you borrow the money to buy the car. You pay the interest out of the value of the car which enables you to get a better job.

But the big problem is the money creation; fractional reserve banking!!
http://en.wikipedia.org/wiki/Fractional_reserve_banking
Which means credit users have to work more hours a day to pay the interest on money, that does not even exist!! Also the paid interest receive the banks, not the peoble putting money on their bank account!

No, it doesn't mean they have to work more hours a day to pay the interest on money unless they take unwise loans. If, for example, you borrow money that allows you to get a better job, you may work fewer hours. Don't blame wasteful consumption on bankers.

Nice points, I am totally with you!!
But I am not fine with the fractional reserve banking yet. Isn't it nonsence to pay interest on money that does not really exist? Or creating money in general? There would be not enough money in the world to pay back all debt plus interest!

[JoelKatz]

And again a downside of interest: the poor pay the rich!! Only rich people can gain opportunity savings, as to receive at least 2% you need to have quite an amount of money these says;) And how needs that money? The poor people ask for credits and therefore pay the interest to the rich. Also companies goning in debt do their costcalculation inlcuding the interest they have to pay back. So in the end everyone buying that companies products also pays his interest debt.

This is another one of those arguments where you focus on just one side of a transaction to come up with a skewed view of the transaction as a whole. For every such an argument, you can do the same thing for the other side of the transaction and come up with an equally bogus argument that makes the opposite point. For example: Loans are such a great deal for the poor, they get to spend rich people's money.

[JoelKatz]

But I am not fine with the fractional reserve banking yet. Isn't it nonsence to pay interest on money that does not really exist? Or creating money in general? There would be not enough money in the world to pay back all debt plus interest!

Every loan creates money. If you have a problem with money creation, you have a problem with lending.

If I borrow money to buy a house, the money I borrowed is still in circulation because I gave it to the person who sold me the house. However, now there is an IOU in circulation as well -- the future money I will earn to pay that mortgage is now already in circulation.

The idea that there's money that "does not really exist" makes me respond "as opposed to what?" Money is just a marker. Money, as money, never really exists any more than a number. Pieces of paper with big numbers on them aren't much more real or less real than numbers in a computer. People do things that way because it makes sense, not because there's some massive global conspiracy.

People work. People buy things. People sell things. Try, for a second, to imagine everyone doing exactly the same things just without moving all the money. The money is just a communications mechanism. It tells a person to work at Burger King, to open a saw mill, or to make me a plasma TV. That's all.

If I'm choosing between being an actor or a pilot, money tells me which my society needs more. If I'm choosing between buying a plasma TV and a burger, money tells me which takes more resources to produce. That's all it does.

[fornit]

But where does the money to pay the interst come from?

From the opportunity value. Ten dollars today is worth more than ten dollars tomorrow because everything you can do with ten dollars tomorrow you can do with ten dollars today plus you can spend it before tomorrow.

ten dollars tomorrow are worth more tomorrow because i know i will have them tomorrow while todays dollars have a likelyhood <1 to ever make to tomorrow plus i have to invest time to secure them so that likelyhood stays close to 1 

When you loan money, you transfer the money from someone who has no way to extract the opportunity value to someone who can and they split the surplus.

in an inflationary currency you mostly just give your money to someone who can invest it into something that doesnt lose value. so a big part of the profit you share is just avoiding inflation. in a deflationary or stable currency the interest rate has to be significantly lower and might not justify the risk of not getting your money back.

[payb.tc]

Every loan creates money. If you have a problem with money creation, you have a problem with lending.

If I borrow money to buy a house, the money I borrowed is still in circulation because I gave it to the person who sold me the house. However, now there is an IOU in circulation as well -- the future money I will earn to pay that mortgage is now already in circulation.

I agree that IOU's are created but not necessarily money created.

Person A: owns $100
Person B: owns $100
Person C: owns $0 and a nice hat

Person C decides to borrow $100 from Person A and promises to repay $110. This doesn't necessarily have to create any money, if this person can just sell his hat to person B, and we end up with:

Person A: owns $110
Person B: owns $90 and a nice hat
Person C: owns nil

A loan was made and repaid (with interest), and no money was created.

Also, that 'nice hat' doesn't even need to be tangible... it could just be Person C's personal labour or time for example.

[the founder]

The problem with this thread is that it instantly turned to "loans"  .. it's possible to pay people interest on their banking accounts without having to loan bitcoins out.

We charge 1/2 of 1% for external transactions (flexcoin to bitcoin) and this INCLUDES the miners fee.  All other transfers are free (flexcoin to flexcoin,  bitcoin to flexcoin).. etc.

we take that 1/2 of 1% ... give about half of it to the miner.   Then the quater of a percent that is left is 70% allocated to the account holders as an interest payment.    we keep the tiny 30% of the 1/2 of 1/2 of 1%.

are people going to get rich off interest allocated like that?  No.

But are we doing fractional reserve lending?  No ...  are we loaning out bitcoins?  No...   

Now the other issues ARE valid...  security for example (mtgox)... the threat of some idiot collecting 100,000 coins and vanishing due to hardware failure, hacking or theft (mybitcoin)  ...

But those issues exist as well for your desktop client...  like the guy that lost 25,000 bitcoins from his desktop.

The answer to this is simple,  do whatever you feel is proper.    I can't force you guys to use flexcoin...  All I can say is we made the most secure online bitcoin bank that we can think of.  We don't loan out bitcoins,  and you get interest based on a 100% transparent formula. 

Make your own decisions if you are going to use an online wallet /  bank / whatever..   personally I think we're doing the community a service by allowing people to  pay for their cup of coffee at the coffeshop with no fees from their cell phone and just use flexcoin ID: coffeshop as compared to the harder to use process now that involves remoting to your desktop and trying to pay that way... or lugging around a laptop.

Again it's your call... 

[JoelKatz]

in an inflationary currency you mostly just give your money to someone who can invest it into something that doesnt lose value. so a big part of the profit you share is just avoiding inflation. in a deflationary or stable currency the interest rate has to be significantly lower and might not justify the risk of not getting your money back.

While it's true that an inflationary currency must be invested or loaned just to maintain its value, the benefit to investing or loaning is the same with a deflationary currency.

If the currency would drop 2% a year and you can make 4% interest with an inflationary currency, all other things being roughly equal, an deflationary currency that would go up 3% a year will offer you about 9% interest. You still lose the same 9% by not investing.

You can easily see why this has to be true. If it wasn't, inflation would be harmless since you could just loan your money to offset it. That would mean the government could print and spend all it wanted without hurting anyone. That's obviously not true.

[cypherdoc]

A banker is an expert at extracting the opportunity value of money.

i stopped reading right there.

the real question is to whose benefit and to whose risk?

[cypherdoc]

Will you give me 100 bitcoins today if I promise to give you 100 bitcoins next year? Of course not -- even if you 100% trust me, you're still giving up the opportunity value of being able to spend those bitcoins within the next year should you choose to do so. There's no reason you should give that up in exchange for nothing. If you hold your bitcoins, that's exactly what you're doing.

I don't understand what you're saying. Your argument seems to imply the exact opposite of your conclusion. You seem to be saying that if you want to be able to use your money at any time, you should let someone else take care of it.

No, I am saying that if you simply hold onto your money, the opportunity value is lost. Whereas, if you deposit the money in a bank, you can extract the opportunity value.

But actually, when you do that, you are risking losing access to your money, because they may run off with it, or do something else irresponsible with it and lose it.

True. That is the downside of a bank. However, the upside is that you don't waste the opportunity value of the money.

And you also seem to argue that this is why you shouldn't hold on to your money... because then you can't use it when you want.

No, that's not what I'm saying. If you hold onto the money, you cannot use it unless you find some way to extract the opportunity value. If you cannot do that, and in general you cannot, that value is wasted. A banker is an expert at extracting the opportunity value of money.

But exactly the opposite of this is true. It is only when you have it that you can use it when you want.

I would say that if you have it, you can only use it when you want. But if you don't want to use it, the opportunity value is wasted. This is value to which you are entitled that you are simply giving up for nothing if you hold the money.

The opportunity value is decreased, not increased, by storing money in a bank.

No, it is increased. That's how the bank pays you interest.

Look, say you have 100 bitcoins and you don't need them until next week. Say someone else needs 100 bitcoins right now, badly enough that he's willing to pay back 110 bitcoins next week. If you hold your 100 bitcoins, you lose the 10 bitcoins of opportunity value you could have made by loaning those bitcoins out. Even if you say "well, then you risk losing the whole 100", you can easily imagine a situation where you could also obtain insurance against loss of your principle for, say, 2 bitcoins. So you still waste 8 bitcoins of opportunity value by holding your bitcoins, and the guy who could have done something with the bitcoins today doesn't get to do that either. Lose/lose. (But then the fewer bitcoins in circulation do benefit some people, so they win.)

Actually, more likely someone else will lend the guy the 100 bitcoins. So he'll have 110 bitcoins less 2 for insurance and you'll have 100. You're playing the sucker.

But Joel, you're thinking is clouded by the system we have in place today which pays interest.

First of all, the banks pay way less interest than they should given the enormous risks they take with our money.  in fact the FDIC has made way more guarantees than it can possibly handle and only maintain the facade thru the taxpayers guarantee.

and none of what you say applies with a deflationary currency which may increase in value with time more than compensating for the small amt of interest paid by a bank along with the risk.

[fornit]

If the currency would drop 2% a year and you can make 4% interest with an inflationary currency, all other things being roughly equal, an deflationary currency that would go up 3% a year will offer you about 9% interest. You still lose the same 9% by not investing.

for everything you win, somebody has to lose. since very few can pay 9% long term, interest will be lower in a deflationary currency than in a inflationary currency. so you lose less when you stick with your money.

You can easily see why this has to be true. If it wasn't, inflation would be harmless since you could just loan your money to offset it. That would mean the government could print and spend all it wanted without hurting anyone. That's obviously not true.

eh, how exactly can everybody loan all his money? in the end, someone has to have it and thats the one who is hurting.

[the founder]

and none of what you say applies with a deflationary currency which may increase in value with time more than compensating for the small amt of interest paid by a bank along with the risk.

That the adoption rate of bitcoins are not exceeding the additional 50 coins per every 10 minutes dumped on the market.  Hence the inflationary pressures on bitcoins currently exceed the adoption rate... it's why we're seeing inflation (IE: bitcoins going from 30 to 13) as compared to deflation (13 to 30).

Now that might change over time... but in all honestly thought it's not centralized via a central bank we're still "bernankeing" the system.   or better said.. printing too many bitcoins to cause deflation at this time.

In fact we're printing more bitcoins in relation to the US dollar because we're seeing the bitcoin exchange rate falling in relation to the US dollar.

[cypherdoc]

and none of what you say applies with a deflationary currency which may increase in value with time more than compensating for the small amt of interest paid by a bank along with the risk.

That the adoption rate of bitcoins are not exceeding the additional 50 coins per every 10 minutes dumped on the market.  Hence the inflationary pressures on bitcoins currently exceed the adoption rate... it's why we're seeing inflation (IE: bitcoins going from 30 to 13) as compared to deflation (13 to 30).

Now that might change over time... but in all honestly thought it's not centralized via a central bank we're still "bernankeing" the system.   or better said.. printing too many bitcoins to cause deflation at this time.

In fact we're printing more bitcoins in relation to the US dollar because we're seeing the bitcoin exchange rate falling in relation to the US dollar.

its more complex than that.  there are the psychological aspects of dynamic markets involved as well.  the decrease from 30-12 could just be a normal cyclical wave which could reverse upwards at any time and have nothing to do with the 50 btc / 10 min.

[Astrohacker]

Perhaps that's what he meant. However, I believe this economic analysis is incorrect. You're saying that by keeping the money in the bank, and having the bank loan it out, that this was good for the economy. There was some positive contribution of wealth that would not have happened without loaning that money out. I believe this is wrong because the total quantity of money is irrelevant. You're not going to improve things by adding money into the system (and I'm well aware that Ben Bernanke disagrees, but he's wrong). So long as the money is sufficiently divisible, the sum total of it is an irrelevant quantity.

I agree with that. However, see my post above. If you don't loan your money out and someone else does, you will turn 100 bitcoins into 100 bitcoins while someone else turns 100 bitcoins into 108 bitcoins.

In practice, inflating a money supply does not increase the wealth. It merely redistributes the purchasing power of the money to the people who get the new money. It is a way of taking wealth from everyone who uses the money and giving it to the people who get the new money. It's equivalent to counterfeiting. For some reason, everyone understands that when a non-banker counterfeits a dollar, it is wrong. But when bankers do it, they think it is right and good, when in fact it is equally as bad.

You are entirely correct in the case of, say, a government printing money. However, this is not correct in the case of loans. The people who get the money pay it back with interest. They get purchasing power today (presumably when they need it more) in exchange for foregoing purchasing power in the future when they expect to need it less.

If people are willing to pay interest, it will typically be because they can make better use of the purchasing power today. Loans help people to efficiently time-shift consumption and production in cases where the most efficient pattern isn't produce-consume.

The obvious example is the guy who gets a job that pays 20% more than he's making, but he needs a car. He can't produce the value he needs to consume in the form of a car without the job. A loan allows how to consume the car now when he needs it, and produce the value of the car later when he will most likely be able to.

Certainly banks do some bad things and certainly people take bad loans. But the fundamental logic of banking and loans is completely sound.

There is nothing sound about fractional reserve banking. It is a giant scam, and probably the biggest mistake in the history of the legal system. It should be illegal. Or better, unregulated, so the market can force banks to keep high reserves.

Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until they have stolen control over 80% of the money.

Banks declare themselves owner of most of the money, and charge a toll (interest) for using it. They are not providing a valuable service. They are trolls executing a giant scam that rips off everyone.

In response to your other points, I defer to cypherdoc.

[D.H.]

Every loan creates money. If you have a problem with money creation, you have a problem with lending.

If I borrow money to buy a house, the money I borrowed is still in circulation because I gave it to the person who sold me the house. However, now there is an IOU in circulation as well -- the future money I will earn to pay that mortgage is now already in circulation.

I agree that IOU's are created but not necessarily money created.

Whether those IOU's are money or not is just a matter of definition. In the real world we often see IOU's as money. Take as an example the balance on your bank account. This is just a statement that the bank owes you X dollars (i.e. an IOU), yet we refer to it as money, and we use it as money (when we transfer money to a friend using the same bank).

People often confuse the "IOU-money" that the bank creates with the "central bank money" that they owe you.