NEW: Bitcoin Fractional Reserve Bank

[nanotube]

As a complementary service to noagenda's anti-deflationary scheme (http://bitcointalk.org/index.php?topic=4780.0) I hereby introduce the Bitcoin Fractional Reserve Bank, to pull the meager bitcoin economy out of the deflationary spiral of doom! By lowering our reserve requirements over time, we can arbitrarily extend the inflationary period of bitcoin, and thus counteract the hard-coded reductions in bitcoin creation rate!

The current reserve ratio is set at a respectable 90 percent, and will be halved every time the bitcoin block bounty is halved (every 210000 blocks). All deposits are backed by the Fractional Deposit Insurance Corporation), up to a maximum amount of 0 bitcoins. All deposits carry an attractive 0% interest rate, which is in the top 5% of all bitcoin depositary institutions!

Further, we are well prepared to deal with any bank run-style event. In addition to the solid backing by the FracDIC, we are prepared to close our doors and suspend operations, until the depositors clamoring for their funds walk away in defeat and frustration.

So, deposit your bitcoins into the BFRB, and I promise to lend out 10% (current rate - will vary in tandem with bitcoin block bounty) of the money you deposit, thus inflating the money supply beyond the built in bitcoin limit! Do it for yourself, do it for the bitcoin economy, do it for me!

* offer not available in stores. shipping and handling charges may apply. limit one account per person.

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[Jered Kenna (TradeHill)]

I think if this trend continues we're going to confuse the piss out of someone that stumbles on these forums.

Pretty funny post though, I like it.

[Distribution]

Haha, I thought the Ben Bernanke was here. We'd have to watch for this if that paper money ever gets out there.

[Hal]

You laugh, but I predict that fractional reserve Bitcoin banks will exist. They'll make loans and pay interest, just as banks have done for centuries.

[Jered Kenna (TradeHill)]

You laugh, but I predict that fractional reserve Bitcoin banks will exist. They'll make loans and pay interest, just as banks have done for centuries.

I don't doubt that at all. Well I guess they couldn't with BTC if they dont have them to loan out.
They will figure something out.

[CCCMikey]

Aye. In Lieu of Bitcoins, here's your 5970. Now get to work!

[Gavin Andresen]

RE: fractional reserve bitcoin banks:

I think it will happen, too.  Because of the nature of bitcoins they could arrange so that their reserves can be audited by anybody (easiest way:  prove they own a particular bitcoin address by signing something with its private key, then send all their reserves to that address).

[MoonShadow]

A fractional reserve bank could exit at up to a 50% reserve ratio, by openly stating that all deposits, including 'on demand' accounts, are used as reserve funds for loans.  Simply loaning out what they actually have on deposit, plus what they have in 'on demand' accounts, would be an advantage over a full reserve bank that had to be able to cover all 'on demand' accounts in full.

[nanotube]

indeed, as i've mentioned several times in various discussions before, setting the reserve ratio anywhere between 100 and 0 percent is simply a tradeoff between riskiness and profitability. I will not be surprised if real fractional reserve bitcoin banking does arise, and various stated reserve ratios will simply attract different clientele.

[Jered Kenna (TradeHill)]

The only part that's hard to verify (as an avg consumer) is how much they loan out.
Unless there's an easy way I'm not aware of.
You are talking about them storing btc and loaning out notes right?

[Anonymous]

I came in here looking for loans. I only found lulz. : (

[xc]

A fractional reserve bank could exit at up to a 50% reserve ratio, by openly stating that all deposits, including 'on demand' accounts, are used as reserve funds for loans.  Simply loaning out what they actually have on deposit, plus what they have in 'on demand' accounts, would be an advantage over a full reserve bank that had to be able to cover all 'on demand' accounts in full.

But then it wouldn't really be a 'fractional-reserve' bank in the traditional (fraudulent) sense, because the depositor knows ahead of time that his on demand deposit account is not fully liquid and the 'on-demand' claim is just marketing.

I would argue that the greatest impediment to sustained, fractional-reserve Bitcoin banking is the simple fact that few in the bitcoin economy will accept bitcoin credit from such a bank.  Why should they when they can get cold, hard BTC directly?  Fractional-reserve banking arose from the fact that representative paper money was more convenient to trade than oz of gold and silver.  But with Bitcoin, it doesn't really get much easier than trading electronic Bitcoin bytes directly (except perhaps in the case of microtransactions).

In the legalized fractional-reserve system of fiat currencies with central banking, states ensure that banking credit at all banks is directly convertible to the same paper fiat (BofA credit = Wells Fargo credit = Paper USD).  This helps create the banking cartel and minimizes the power of the bank run.  It homogenizes the perception of banking credit as synonymous with the underlying money and strengthens the fractional-reserve illusion.  But nobody, state or otherwise, will be able to convert inflated btc bank credit directly into Bitcoin specie - the Bitcoin software will simply reject the transaction!  Competing bitcoin financial institutions and individual users will always be able to demand pure BTC to keep BTC lenders honest.

None of this precludes traditional lending (just the destructive, inflationary kind).  BTC banks will generally be limited to lending only what they have and with the permission of depositors.  Interest rates, of course, will undoubtedly be higher.

[ffe]

A fractional reserve bank could exit at up to a 50% reserve ratio, by openly stating that all deposits, including 'on demand' accounts, are used as reserve funds for loans.  Simply loaning out what they actually have on deposit, plus what they have in 'on demand' accounts, would be an advantage over a full reserve bank that had to be able to cover all 'on demand' accounts in full.

I would argue that the greatest impediment to sustained, fractional-reserve Bitcoin banking is the simple fact that few in the bitcoin economy will accept bitcoin credit from such a bank.  Why should they when they can get cold, hard BTC directly? 

Why can't the bank deliver real hard BTC? Fractional reserve relies on the fact that the demand for hard BTC will never be 100% of deposits, not that demand for hard BTC will be zero.

[kiba]

Bitcoin banks will get killed by bank runs and rumors spread by their customers.

[Jered Kenna (TradeHill)]

Bitcoin banks will get killed by bank runs and rumors spread by their customers.

I agree but I'm going to assume that people said the same thing when they were coming up with fiat and fractional reserve.

[xc]

Why can't the bank deliver real hard BTC? Fractional reserve relies on the fact that the demand for hard BTC will never be 100% of deposits, not that demand for hard BTC will be zero.

What I mean is that very few will take bitcoin 'checks.'  In the fractional banking system, credit represented in checks circulate as real money.  Vendors accept these checks as if they were hard money.  This helps create the essential time delay necessary for fractional-reserve banking.  In the modern variation with central banks, the entire banking system works as a cartel and there is effectively only one bank (all banks accept each others checks).

-Let's say Black deposits 100BTC at Bitcoin Bank A.
-Bank A gives Black access to an on-demand deposit account with 100 BTC maintained on Bank A's database.
-Brown wants to start a business and needs capital.
-Bank A 'lends' 100BTC to Brown by creating a second on-demand deposit account controlled by Brown with 100 BTC.
-Bank A thus keeps 100 BTC on reserve for 200 BTC of on-demand deposit accounts (50% reserve).

Now Black and Brown want to spend some of their checkbook BTC money.  Brown, in particular, needs to spend most of his 100BTC to buy capital for his new business.  Will other vendors accept it?  

After all, the Bitcoin-denominated accounts seen by Black and Brown are not the same hard BTC recognized by the Bitcoin software or protocol.  Many vendors run their own nodes.  Every individual running a node (or even the simplified verification system) is in fact serving as an individual 'bank' outside of Bank A.   Bank A's checkbook BTC is therefore not equivalent to hard BTC - and no state or government can effectively cartelize all the merchants and individuals to make this so.  Merchants using the Bitcoin transaction system will be debiting hard BTC out of Bank A's accounts.

Because of the digital nature of BTC any failure to supply funds is quickly apparent.  Bank A is unable to stall runs because the circulation of Bank A's checkbook money is extremely limited.

[Raulo]

Fractional reserve banking is certainly possible with Bitcoin, the very same way it was possible with gold and silver coinage. And it will eventually happen because it is quite profitable.

I'd add that there is nothing wrong with fractional reserve banking in itself. The only thing that is wrong is advertising on demand deposits as "on demand" whereas they are actually "on demand" only until there is a bank run (which may never happen but there is some risk).

[CryptikEnigma]

Isn't fractional reserve banking basically creating money out of debt though?

[sortedmush]

I don't think there's anything wrong with fractional reserve banking. It's intuitively repulsive to me, but there's no violence in the business model. Although there is of course violence in it's current central bank implementation. If there are competing BitCoin banks (which I think there would be), the ones that take the piss will lose customers. There'll be no bailing them out, so they'll just die.

I'm so excited! All we need to do, is come up with an explaination of bitcoin that a critical mass of people will understand. Then we will have seperation of state and economics! Interesting times eh?

Wait..

Unless the state can convince a critical mass of people that terrorists can transport explosives digitally.

Then we're doomed. DOOMED i tells ya!

[Jered Kenna (TradeHill)]

Unless the state can convince a critical mass of people that terrorists can transport explosives digitally.

Then we're doomed. DOOMED i tells ya!

They can pay for the money to buy them digitally so they're going to say that's basically the same thing.

[sortedmush]

Unless the state can convince a critical mass of people that terrorists can transport explosives digitally.

Then we're doomed. DOOMED i tells ya!

They can pay for the money to buy them digitally so they're going to say that's basically the same thing.

Good point!

[Jered Kenna (TradeHill)]

Unless the state can convince a critical mass of people that terrorists can transport explosives digitally.

Then we're doomed. DOOMED i tells ya!

They can pay for the money to buy them digitally so they're going to say that's basically the same thing.

Good point!

Yeah I'm honestly a little worried what's going to happen when it gets big enough that people want to hurt it and it gets used for something really bad. ie terrorism, organ trafficking or terrorism.

The sensational headlines are going to get a lot of people convinced it's pure evil. Of course the publicity is going to be huge.
I wonder what peoples response will be when you say "so, isn't that what cash is used for now?" 

[sortedmush]

Yeah I'm honestly a little worried what's going to happen when it gets big enough that people want to hurt it and it gets used for something really bad. ie terrorism, organ trafficking or terrorism.

The sensational headlines are going to get a lot of people convinced it's pure evil. Of course the publicity is going to be huge.
I wonder what peoples response will be when you say "so, isn't that what cash is used for now?" 

Yeah. People could barter for those things anyway. Or use government sanctioned pieces of paper for it. Any argument they use against BitCoin goes for all property.

[Jered Kenna (TradeHill)]

Yeah I'm honestly a little worried what's going to happen when it gets big enough that people want to hurt it and it gets used for something really bad. ie terrorism, organ trafficking or terrorism.

The sensational headlines are going to get a lot of people convinced it's pure evil. Of course the publicity is going to be huge.
I wonder what peoples response will be when you say "so, isn't that what cash is used for now?" 

Yeah. People could barter for those things anyway. Or use government sanctioned pieces of paper for it. Any argument they use against BitCoin goes for all property.

Oh I agree for sure but that won't stop the claims and arguments. These markets already exist and they're paid in cash / diamonds / gold or whatever else. BTC could just make it easier is all. But so do atm cards, western union and 1000 other inventions. 
I assume we don't have $1000 USD notes for 2 reasons. More efficient to counterfeit and easier to transport large amounts of cash.
One of BTC's real advantage (or disadvantage from the other side) is that you can move a hell of a lot more cash than you could fit in a brief case or duffel bag anywhere in the world. Just makes using cash easier is all.

[nanotube]

-Let's say Black deposits 100BTC at Bitcoin Bank A.
-Bank A gives Black access to an on-demand deposit account with 100 BTC maintained on Bank A's database.
-Brown wants to start a business and needs capital.
-Bank A 'lends' 100BTC to Brown by creating a second on-demand deposit account controlled by Brown with 100 BTC.
-Bank A thus keeps 100 BTC on reserve for 200 BTC of on-demand deposit accounts (50% reserve).

you seem to have an incorrect understanding of fractional reserve, more specifically, of what the 'reserve' percentage means.
in the case you describe, having 100btc deposit, and lending out all 100btc, you end up with 0% reserve, not 50%. A bank cannot lend out more btc than it actually has.

please consult the following for more details:
http://en.wikipedia.org/wiki/Fractional-reserve_banking

[MoonShadow]

-Let's say Black deposits 100BTC at Bitcoin Bank A.
-Bank A gives Black access to an on-demand deposit account with 100 BTC maintained on Bank A's database.
-Brown wants to start a business and needs capital.
-Bank A 'lends' 100BTC to Brown by creating a second on-demand deposit account controlled by Brown with 100 BTC.
-Bank A thus keeps 100 BTC on reserve for 200 BTC of on-demand deposit accounts (50% reserve).

you seem to have an incorrect understanding of fractional reserve, more specifically, of what the 'reserve' percentage means.
in the case you describe, having 100btc deposit, and lending out all 100btc, you end up with 0% reserve, not 50%. A bank cannot lend out more btc than it actually has.

please consult the following for more details:
http://en.wikipedia.org/wiki/Fractional-reserve_banking

I think that you are both arguing on the same side, but from different perspectives.

[xc]

you seem to have an incorrect understanding of fractional reserve, more specifically, of what the 'reserve' percentage means.
in the case you describe, having 100btc deposit, and lending out all 100btc, you end up with 0% reserve, not 50%. A bank cannot lend out more btc than it actually has.

Not really.  My example just simplifies a little bit.  When looked at from the perspective of the banking 'system,' the end result is the same.  This thread seems to touch on the difference: http://mises.org/Community/forums/t/22490.aspx . Banks don't have to lend out the hard reserves - particularly when all the banks form one system.  Khan Academy describes the difference between 'modern' (banks working as one system) and 'primitive' (single bank's perspective) fractional reserve banking: http://www.youtube.com/watch?v=ZyyaE3DIxhc (3 to 6 minute mark)

My argument, though, is that it will be difficult to sustain a fractional bitcoin banking system because:
a) Any given bitcoin bank's on-demand deposits (what you see on the bank's database) will not circulate as equivalent to or as widely as hard BTC (what you see through Bitcoin software)
b) The decentralized nature of the protocol prevents cartelization of bitcoin 'banks'
c) Nobody can act as a central bank to 'inject' artificially created BTC to prop-up liquidity

End result: runs cannot be prevented or forestalled.  Bitcoin banks will have to be honest to depositors that their funds cannot be both on-demand and lent out.

[em3rgentOrdr]

A Fractional Reserve Bitcoin Bank.  Its inevitable that someone will create it someday.  But at least it will be disciplined by the relentless and unforgiving forces of mathematics and reality.

[matonis]

Intriguing thoughts from @webisteme on Bitcoin and Fractional Reserve Banking:
http://www.webisteme.com/blog/?p=192

...and, my comment to his blog post:
This is an interesting thesis. At this point in bitcoin’s evolution, I still see any bitcoin ‘reserves’ as similar to gold (or silver) reserves with the primary difference being that bitcoin does not suffer the same portability, divisibility, and security issues which gave rise to the gold reserve note in the first place. Back to the demand side of money, why would a user accept a bitcoin reserve note when the actual bitcoin has better overall transactional properties than its derivative?

Having said that, in the absence of a parallel bitcoin fork or parallel cryptocurrency, I do not believe that the bitcoin economy will support fractional reserve banking. I disagree with Gavin Andresen on this point. Lending will indeed exist through timed deposit instruments rather than ‘on-demand’ current accounts. This would not be unlike the gold leasing arrangements that exist today for the world’s above-ground gold reserves (of, course, I’m referring to the non-fraudulent ones). Being highly divisible, fungible, nearly real-time, and already decentralized, bitcoin negates the conditional criteria that gave rise to fractional reserve free banking in the pre-bitcoin era.