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Author Topic: Issuing loans in Bitcoin, how we could do it  (Read 957 times)
LeGaulois
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June 13, 2019, 06:21:07 PM
 #1

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

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June 13, 2019, 07:00:55 PM
 #2

As I heard centralized crypto currencies are having a option to control the transaction by higher end but it in block chain nodes i am unsure about it.
Here you could  find a board how people are issuing loans with collateral or other things.
You may check the thread link here.
https://bitcointalk.org/index.php?board=65.0

 
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June 13, 2019, 07:20:43 PM
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 #3

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

Why wouldn't it work the same way? With dollars, banks are legally required to keep a certain proportion in reserve. The rest can be lent out for interest. Why can't banks take Bitcoin deposits the same way and then lend them out in fractional reserve?

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

Through the courts, they do. If you draw up a contract with a borrower securing the debt with their house, that contract is enforceable in court the same way it is for banks.

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June 13, 2019, 07:36:07 PM
 #4

Loans issued in Bitcoins is a win win situation between the borrower and lender. If the  price of Bitcoins goes up after issuing, the lender has more to pay in fiate and vice versa for the borrower.

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June 13, 2019, 08:10:33 PM
 #5

Through the courts, they do. If you draw up a contract with a borrower securing the debt with their house, that contract is enforceable in court the same way it is for banks.
Exactly this. If you have a loan or a mortgage from a traditional bank, and you cease making payments, the bank don't just send some employees round to strong-arm you in to making a payment or handing over you house keys and paperwork. They take the contract which you signed to the relevant local court and begin proceedings for debt recovery, foreclosure, repossession, or similar. There is no reason this couldn't happen with a bitcoin loan, provided the paperwork was altered as necessary and full KYC procedures were carried out.

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June 13, 2019, 09:20:36 PM
 #6

Banks don't deal with Bitcoin not because they hate it, but because it doesn't have determined legal status, and regulators would probably get very suspicious if a big company started using it, as Bitcoin has reputation of being used in money laundering. If governments gave green light to use Bitcoin, banks would totally do so, it's just another currency for them, another opportunity to earn profit.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

It's another problem with regulation, if Bitcoin is not viewed legally as money or as commodity, it can create loopholes which can lead to much harder collection of debts.

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June 13, 2019, 10:10:17 PM
 #7

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

If banks are accepting bitcoin deposits, they can just lend out those bitcoins and ask for interest in return. One simple way of looking at it or perhaps I'm missing something?

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

Before agreeing to loan terms, create a contract and make it so that both parties will never break the rules of the contract. The average Joe always has the same power to collect payment when payment is not fulfilled by the debtor. They can always come to a court of law and file a case against the debtor. The problem is, if bitcoin isn't considered as money on where the loan is fulfilled, it would be difficult for the loaner to collect payment from the debtor as the courts would surely be scrambling around thinking what case could be filed as bitcoin isn't defined on their law.

 
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June 13, 2019, 10:54:13 PM
 #8

Loans issued in Bitcoins is a win win situation between the borrower and lender. If the  price of Bitcoins goes up after issuing, the lender has more to pay in fiate and vice versa for the borrower.

How is it a win for the borrower if the borrower has to spend more to just pay back the bank its Bitcoins?

It only adds more risk and cost to the side of the borrower. One way or another, there is always one party that's losing if you deal with a loan in Bitcoin. Also, it's not even sure that the bank has won when the price has gone up because it depends on the borrower to pay back first, and by the time the debt has been settled, the price may have corrected again.

It's more likely that loans will be handed out in tokens like Tether. You can print them whenever you want or just do it based on the demand for them, and there is way less risk involved for both parties.

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June 13, 2019, 11:06:43 PM
 #9

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.
Yes, he edits number on your balance but that's not something magical because behind those numbers there is real money, they can't lend more than they can. For example there is some percent of money taken from every deposit and saved in reserves for every bank, ie you deposit 100$, bank can only lend 70$ from it, 30$ must be in reserves.
Yes, average "joe" has same power too, just agreement is different, you have to go in notary beauro, sign contract and etc, there are a lot of details in different countries which can't be written here well.

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June 13, 2019, 11:36:14 PM
 #10

There are some points we need to consider:

1) The person requests a loan of $100,000 payable in bitcoins
2) The person requests a loan of 12BTC (~$100,000)
3) the lender is a banker
4) the lender is a joe average

A question coming is, should contracts settle in fiat or Bitcoin? What about the interests.
If the contract is in dollars, for example, the lending portion of 12 bitcoins ( $100k) you repay 1% per month,  $1000 (without interest)
If the contract is established in Bitcoin, the loan part 12 Bitcoins and you repay 0.12 BTC per month (without interest)
You can end with a very very cheap interest rate to buy a house.

As a bank, it's easy if the borrower doesn't pay, it goes to the court, the bank seizes the house. remember in 2008 how many people in The US lost their house. Whatever, you will always have to pay soon or later.

For the average Joe, it's a bit more difficult. Yes, he can hire a lawyer and go to a justice court. How many time it will take? 3 Years or more to see a judge? A judge that will surely say he's not competent to give a judgment since he doesn't even know what you're talking when you say Bitcoin and the chance that Bitcoin itself has not really a legal status in the said country.

I don't say it's impossible but the average Joe it's not so easy as banks, not the same power. Since we claim 'Be your own bank', let's say I lend you 50BTC and you're supposed to repay 1BTC per month during + 4 years. The first year, you repay me regularly without incident, the second year you start to ask for a delay, the third year you're gone. Will I be able to seize the funds on your bank account as banks can do? No

Let's say now we use a smart contract. Not sure which, for exemple, if the total amount isn't repaid after 5 years, the house bought with the money changes its ownership to the lender. Will, it even be considered as a legal contract? you can't send your smart contract to the land registry and say now it's mine.

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June 13, 2019, 11:45:30 PM
 #11

Why cant it work the same as a bank? The bank doesn't magically create money, it uses money from deposits to lend out. That could be done with bitcoin. Also, an individual very well can have the same level of claim as a bank to say...your house. You could sign a loan to an individual and put your house up as collateral. The issue is not whether that can be done, but actually collecting on a default. That process gets very expensive and requires lawyers, which may not be as easy for an individual to pursue.
Another issue with loans denominated in bitcoins is most likely, that person is cashing out the coins to purchase something. With a dollar that isn't a huge deal as deflation is a percent or two per year, but a bitcoin that can gain huge gains overnight, there is a very large risk that the borrower could never pay the loan back and that the collateral quickly becomes worth less than the loan amount.



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June 14, 2019, 12:11:11 AM
 #12

The bank doesn't magically create money
It absolutely does. I'd suggest having a read of this article from the International Monetary Fund: https://www.imf.org/external/pubs/ft/fandd/2016/03/kumhof.htm. And if you are really interested and have the time, take a look at this paper published in International Review of Financial Analysis: https://eprints.soton.ac.uk/372866/. A relevant quote from each below:

Quote
Assume that a banker has approved a loan to a borrower. Disbursement consists of a bank entry of a new loan, in the name of the borrower, as an asset on its books and a simultaneous new and equal deposit, also in the name of the borrower, as a liability. This is a pure bookkeeping transaction that acquires its economic significance through the fact that bank deposits are the generally accepted medium of exchange of any modern economy, its money.

Quote
It has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air.

Essentially, if you take out a new loan of say $100, the bank creates both a credit of $100 and a debit of $100 in your name. You are given $100 of new money and also given a $100 debt to repay. The bank's balance sheet doesn't change, and they don't move any money out their reserves to cover your loan. The $100 loan is brand new money created out of thin air.

This is impossible to do with bitcoin, since if you were to take out a loan the bank HAS to give you the relevant amount in bitcoin so you can transact it.

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June 14, 2019, 02:30:58 AM
 #13

The bank doesn't magically create money
It absolutely does. I'd suggest having a read of this article from the International Monetary Fund: https://www.imf.org/external/pubs/ft/fandd/2016/03/kumhof.htm. And if you are really interested and have the time, take a look at this paper published in International Review of Financial Analysis: https://eprints.soton.ac.uk/372866/. A relevant quote from each below:

Quote
Assume that a banker has approved a loan to a borrower. Disbursement consists of a bank entry of a new loan, in the name of the borrower, as an asset on its books and a simultaneous new and equal deposit, also in the name of the borrower, as a liability. This is a pure bookkeeping transaction that acquires its economic significance through the fact that bank deposits are the generally accepted medium of exchange of any modern economy, its money.

Quote
It has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air.

Essentially, if you take out a new loan of say $100, the bank creates both a credit of $100 and a debit of $100 in your name. You are given $100 of new money and also given a $100 debt to repay. The bank's balance sheet doesn't change, and they don't move any money out their reserves to cover your loan. The $100 loan is brand new money created out of thin air.

This is impossible to do with bitcoin, since if you were to take out a loan the bank HAS to give you the relevant amount in bitcoin so you can transact it.

I think your confusing the properties of magically creating money with that of fractional reserves. There is nothing magic about it and they cannot do it indefinitely, which they would be able to if it was indeed "magic" as you suggest. The same fractional reserve can be done with bitcoin, you just need customer deposits.



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June 14, 2019, 02:36:18 AM
 #14

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

A crypto bank will be an interesting concept but it’ll be equally difficult to operate it as many county’s law do not support bitcoin hence if the person taking loan doesn’t repay there’s nothing you can do about it. One way to go about this is to accept a valid collateral, or hire an escrow agency that will help you recover your debt. In my personal opinion it’s very difficult to continue running a crypto bank, as there’re lots of hassles involved in it.

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June 14, 2019, 04:04:03 AM
 #15

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

I know people with credit card debts that have never been arrested or made to pay up. Even banks can have a hard time going through the process and sometimes you just compute how much you can get out of it. If the legal costs exceed what you can gain, then sometimes you'd just charge it up to experience.

So with individuals, the risk is even higher. Again, I know people who lend out cash and some of those never got paid back. That is why the "loanshark" usually charge a higher interest than banks, they have to make up for money lost from defaulting customers.

Back to bitcoins, if everyone is using bitcoins, wouldn't there be pressure to pay up if everyone sees who's receiving what? Maybe a condition for giving a loan is to make the borrower's receiving address public. What I meant is to link the borrower's identity with the address he's going to receive the money with. The lender would also list his receiving addresses for payments.

People would know who's not paying who. If someone is asking for a loan, people can just look them up more easily. Default on debts a few times and soon no one would be lending you anything. The records are also there if the lender wants to pursue a case. I think it'll be just back in time where people live in smaller communities and know each other, there's a negative incentive for ripping off others.

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June 14, 2019, 05:10:42 AM
 #16

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.
Just same as the fiat money loan,give loan only after collecting valid collateral like documents of house,if the borrower didn't pay you back the lend amount then you can seize the home as per the agreement you made earlier but it is possible only if government makes crypto as legal form of asset or money or there will be no actions can be taken if the borrower refuse the pay back the money.

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June 14, 2019, 08:19:34 AM
 #17

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

Banks will still be capable of operating on a fractional reserve basis, even if the loan is denominated in bitcoin.

Much like how we suspect a lot of exchanges and hosted wallets right now to not be keeping full reserves all the time. It's not something impossible to do at all if their operations involve transactions which require coins to be transferred into the receiving entity's sole possession, which is what happens the majority of the time with hosted wallets anyways.

But this involves a ton of trust, and I doubt that a lot of bitcoin users will buy into a fractional reserve system like this given the fact that one of the fundamental aspects of bitcoin is its trustlessness - that you don't need to trust anyone to hold your wealth when it's on the blockchain. But given enough demand, even traditional banks which already have mortgage operations can simply re-denominate loans into BTC, while maintaining the same legal hold over the collateral of the mortgage (the property).

 
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June 14, 2019, 11:13:22 AM
 #18

Essentially, if you take out a new loan of say $100, the bank creates both a credit of $100 and a debit of $100 in your name. You are given $100 of new money and also given a $100 debt to repay. The bank's balance sheet doesn't change, and they don't move any money out their reserves to cover your loan. The $100 loan is brand new money created out of thin air.

But if that 100$ is money made out of thin air...the the debt is also made out of thin air, right?   Grin Grin

And let's say after the bank has created this free 100$ out of thin air, I decide with that 100$ to come back and pay my debt in full. What happens to the money?
The bank erases your debt, takes back the money and everything is just as before you asked for a loan.
So, paying back your debt is ...burning money made out of thin air?


For the average Joe, it's a bit more difficult. Yes, he can hire a lawyer and go to a justice court. How many time it will take? 3 Years or more to see a judge? A judge that will surely say he's not competent to give a judgment since he doesn't even know what you're talking when you say Bitcoin and the chance that Bitcoin itself has not really a legal status in the said country.

I don't say it's impossible but the average Joe it's not so easy as banks, not the same power. Since we claim 'Be your own bank', let's say I lend you 50BTC and you're supposed to repay 1BTC per month during + 4 years. The first year, you repay me regularly without incident, the second year you start to ask for a delay, the third year you're gone. Will I be able to seize the funds on your bank account as banks can do? No

Let's say now we use a smart contract. Not sure which, for exemple, if the total amount isn't repaid after 5 years, the house bought with the money changes its ownership to the lender. Will, it even be considered as a legal contract? you can't send your smart contract to the land registry and say now it's mine.

Neah, it's far easier and faster.
Two stores had an unpaid debt to our family business, it took us about 3 months to go through the paperwork and have their bank accounts frozen, the debt amount taken and reimbursed.

In my third job, I didn't get paid one month because of "problems" , when the payment day for the second month expired I went to the department that covers workers protection, signed a declaration, attached a bank statement proving I have not received any funds in the last two months and in 30 days I had all the documents I required to go go to a collection agency and ask for their funds / good/ property to be put on a distraint order.
Got my money in about two weeks.

As long as you have a legal contract certified by whatever needs to so to be valid in your country jurisdiction, lawyer, register, notary, you can act the moment the terms were breached.

But yeah, right now, you can stick your smart contract....in a usb port :PPP
You need a real thing.

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June 14, 2019, 11:45:02 AM
 #19

I started to think about it. How a bank and folks could issue loans to people?

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.
If he doesn't have the strength to ask for a debt, he won't lend it to others. Maybe he has a gangster power behind him and nobody knows it. and when the debtor wants to escape, he can use his forces to suppress it. This is quite simple because I know some crypto lenders and I understand how it works.

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June 14, 2019, 11:59:51 AM
 #20

Currently, when you need to borrow money, your banker just edits your balance account and create money magically. You then pay back monthly.
Banks won't be able to do that with Bitcoin with its limited supply. You can't print bitcoins.

The banks have to have in their vaults, in a way or another, certain % of the money they borrow.
For Bitcoin this will be certainly 100%. It will be in the same way you can borrow an object (eg hammer) from your neighbor.
The banks will have to have those coins, meaning somebody will have to "deposit" coins and get some advantages off that.

This was the wonderful and shiny theory.
In reality the banks certain services will try to offer custodial wallets so people keep money there without getting paid.
In reality those services will try that instead of sending out the loaned money to a certain wallet, make the user keep the money in their custodial wallet.
The result is that they can borrow thin air (I-owe-you notes) and we are back to square 1.

But now, between folks. Let's say I'm the banker and you're the customer looking to borrow money to buy a house. I can lend you the money but how to be sure you will pay me back with full interests? With banks, the solution is easy, the bank seizes the house and you can't do something. But the average Joe hasn't the same 'power' than a bank to collect a debt.

If the borrower needs the money to pay for something as big as a house, it can be done by anybody in the same way the bank does. Only a proper lawyer is needed for the papers.
The things get more complicated for the loans where people don't "put down" something valuable for the loan. The banks get their cut from the next paychecks, here's their power, where I don't know how can average Joe compete.

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