Are fractional reserves inevitable with BTC or will it shrug it off?

[gentlemand]

Latest attempt here - https://finance.yahoo.com/news/mastercard-wants-patent-fractional-cryptocurrency-232545119.html

We all know how fond traditional finance is of the fractional reserve system. it's what they know and how they operate and they're slowly moving into cryptoland.

We also know that one of the reasons cryptoland came into being is because of the evils fractional reserve banking allowed to flourish.

We also also know that we simply do not need a third party and they've consistently proved to be a proper liability, however many people probably will want their hand held and the price of that may be the dilution of what they believe they've deposited there.

How do you reckon this will play out? Will the service providers who might be tempted to go down this route figure out it's a hopeless dead end? Will The People wise up before they attempt to take over the world? Is the whole thing simply not possible as anyone anywhere can demand and handle 'real' coins? Will we have a totally segregated bankster crypto scene that occasionally gives you the real deal if you behave?

Enlighten us.

[cellard]

All that matters is that it cannot be done in bitcoin. The fact that it can be done in altcoins just makes bitcoin's value even more obvious.

Some have argued that it could be done in bitcoin too. I don't really understand the fears of the legacy banking gangsters going into bitcoin and trying to play the same game again. If they try they will just burn their fingers in the process.

I still haven't heard a reasonable explanation to run fractional reserve banking on top of a decentralized, immutable asset limited in amount. Coins are limited to 21 million no matter what, this is what guarantees attempts at fractional reserve will only be short lived Maddoff schemes which will collapse for these trying to get away with it.

[fabiorem]

They will need to create their own coin for that. And it will fail, of course.

[figmentofmyass]

How do you reckon this will play out? Will the service providers who might be tempted to go down this route figure out it's a hopeless dead end? Will The People wise up before they attempt to take over the world?

i don't think the realities of fractional reserve banking have set in for most people. it's possible they never will, at least until bail-ins become the norm or banking failures cause a major economic collapse.

if banks become crypto custodians, fractional reserve is definitely inevitable. whether under the current financial system or a completely free market, more aggressive banks will take more risks with depositors' money. i don't think hal finney was too far off when he made this comment:

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.

[Biodom]

How do you reckon this will play out? Will the service providers who might be tempted to go down this route figure out it's a hopeless dead end? Will The People wise up before they attempt to take over the world?

i don't think the realities of fractional reserve banking have set in for most people. it's possible they never will, at least until bail-ins become the norm or banking failures cause a major economic collapse.

if banks become crypto custodians, fractional reserve is definitely inevitable. whether under the current financial system or a completely free market, more aggressive banks will take more risks with depositors' money. i don't think hal finney was too far off when he made this comment:

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.

An interesting quote from Hal Finney.
I am typically more of the absolutist (against fractional reserve in bitcoin), but he made a great point.
There is one caveat: these 'banks" have to be freewheeling with NO government support.
If they fail, then they fail, bitcoin would not be affected.
I am not sure that it is possible, though, considering the wall street proximity of "new banks' (like bakkt, circle, coinbase, etc.).

Another thought: with fractional reserve, the hyperbitcoinization might set in motion and we will simply transition to a presumably planetary money system based on bitcoin  plus fractional reserve units/derivatives of it. With fractional units present, btc price might be lower than some of the numbers suggested below.

https://nakamotoinstitute.org/mempool/hyperbitcoinization/
https://medium.com/coinmonks/hyperbitcoinization-winner-takes-all-69ab59f9695f

[davis196]

Fractional reserves are a "financial temptation" for every banking system.
If crypto becomes mainstream,I'm sure that sooner or later,the "limited supply" deflationary nature of bitcoin will be over,due to massive amount of hard forks,or the creation of a btc-backed token with a fractional reserve.

[LeGaulois]

A fractional reserve won't happen. Legacy banking doesn't need to apply a fractional reserve for a currency in a grey area (not really existing officially). If a bank could they would triple the current fractional res. without the government.

[gentlemand]

If crypto becomes mainstream,I'm sure that sooner or later,the "limited supply" deflationary nature of bitcoin will be over,due to massive amount of hard forks,or the creation of a btc-backed token with a fractional reserve.

We're going to be in nappies or dead by the time the deflation becomes a proper deal, but I think that's going to be the great battlefield of the future. Dunno if enough people will have the balls to attempt to raise the 21 million limit but there'll be many back door attempts that'll be ever more insidious.

[figmentofmyass]

If crypto becomes mainstream,I'm sure that sooner or later,the "limited supply" deflationary nature of bitcoin will be over,due to massive amount of hard forks,or the creation of a btc-backed token with a fractional reserve.

We're going to be in nappies or dead by the time the deflation becomes a proper deal, but I think that's going to be the great battlefield of the future. Dunno if enough people will have the balls to attempt to raise the 21 million limit but there'll be many back door attempts that'll be ever more insidious.

i'm not so worried about the supply being diluted at the protocol level. but leverage and financialization can play a big role in facilitating fractional reserve in bitcoin markets, and that can dilute the effects of bitcoin's limited supply. naked shorting or leveraged shorting with non-bitcoin collateral can move the spot markets. counterparty commingling of assets and rehypothecation of collateral can artificially inflate the supply because it's common on wall street for physically-settled collateral to be pledged to multiple parties. the more liquidity that gets sucked into paper markets, the easier it is to offset the scarcity of bitcoin. central counterparties (like bakkt) have some incentive to employ omnibus commingling and rehypothecation because it makes them more money and it's legal.

[bbc.reporter]

They will need to create their own coin for that. And it will fail, of course.

Agreed, or their own exchange.

@gentlemand. It is hard to speculate without thorough knowledge on the patent. What is it about on a technical level and are they allowed to patent it?

[cluit]

No one can really properly "patent" anything in crypto world. If you want to try than you can however crypto is crypto and will work towards whatever it wants without caring about your patent at all. Fractional reserves is definitely not needed in our world, we are good as it is without needing it and definitely won't help us at all. We need to stay decentralized and we need to make sure to kill all the mastercard/visa is trying to do before they do it.

The card companies are dying out there trying to stop bitcoin because as soon as banks start to use blockchain and so forth for payments instead of their cards we will not have to use them and they will become obsolete which would really kill all of their profits and they really don't want to get bankrupt so they are trying to innovate on our direction as well trying to over innovate us but they are waaay too late to the game.

[gentlemand]

@gentlemand. It is hard to speculate without thorough knowledge on the patent. What is it about on a technical level and are they allowed to patent it?

I'm not talking about the ins and outs of this particular proposal. Most patents aren't designed to ever be used, they're mainly to park an idea. It's more about the generalised desire to attempt it. There'll be plenty more.