Issuing loans in Bitcoin, how we could do it

[Shenzou]

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.

With bank systems when you are given a loan you are obligated to pay it back with interest, because in real life they have all your info and details and they can pursuit by law and police if you don't pay it back in time, but with bitcoin it is different, first you have the price of bitcoin constantly chagrining which means paying the loan back will vary depending on the price, and also bitcoin is supposed to be anonymous so there should be no personal details that would be given, details like where you live, and if someone does not pay you back you can't do anything about since bitcoin is not regulated by the law and government has no power over it, however there has been a p2p landing site a couple of year ago called BTCjam where people post their projects and how much they need and people will give them btc and they expect interest in return, but i shut down a while ago fir unknown reason.

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[o_e_l_e_o]

a custodial wallet issues a loan to user account, and real btc transacted only when user withdraws
so the custodial wallet can act just like a bank (managing it like a real bank may run into some issues)

I take your point, but with fiat, banks can just change numbers in a database without any money actually moving. If you try to spend loaned bitcoin anywhere other than sending it to another user of the same custodial wallet, then they have to have enough bitcoin in reserve. Fractional reserve could only work with a very high fraction in reserve.

first you have the price of bitcoin constantly chagrining which means paying the loan back will vary depending on the price

The contract for any loan would simply state whether the repayment value is based on BTC or fiat.

[tonyvo2017]

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 think they only lend BTC to people in the same country as them and they can manage their information. because loans need to be very careful in determining the identity of borrowers.
otherwise, I think they will only lend money to big businesses because they are reputable enough to repay the debt.

[darewaller]

I feel like loans are the biggest reason why we are in this mess to begin with. Banks give you loan and expect you to pay it back with interest but if too many people do the same then there would be eventually someone who couldn't find the interest, there is a finite amount of money and unless you give out the exact amount expecting more back is the problem.

Lets say bitcoin is capped at 21 million and all of them were mined by just one person, he gives 21 million bitcoin as loan and expects you to give him back with interest, since there is finite amount you can't give him interest back since it doesn't exist. Well if we do small loans even at 1 satoshi eventually the amount of loans given and couldn't get back will reach 21 million and above, that is when inflation and money printing happens in fiat and we don't want that in bitcoin.

[exstasie]

In order to see if this could work out, we have to solve following two limitations:
1. It is impossible to issue loans and charge interest in terms of Bitcoin until Bitcoin becomes primary currency in the economy.
2. Banks can't maintain big reserves in terms of Bitcoin unless Bitcoin becomes primary currency in the economy.

#1 is only impossible at scale (like major retail banks today). It's already done on small scales. For example, see the lending board right on this forum. Loans are made in BTC everyday.

Regarding #2, I think it's implied that banks can't lend out BTC until they start accumulating adequate reserves via deposit accounts. Eventually, retail banks will offer BTC depository accounts alongside regular checking, money market, and other accounts. We may see this start on a small scale (like a small regulated bank offering a niche use case) long before BTC becomes a "primary currency in the economy."

BTC doesn't need to be the currency. It doesn't have to replace fiat money. Enough people just need to have faith in it as money to start seeing these use cases popping up.

[BitHodler]

I feel like loans are the biggest reason why we are in this mess to begin with. Banks give you loan and expect you to pay it back with interest but if too many people do the same then there would be eventually someone who couldn't find the interest, there is a finite amount of money and unless you give out the exact amount expecting more back is the problem.

I think it's just part of how the financial system works. Even if loans aren't likely going to be paid back, you can always repack multiple potentially unprofitable loans and turn it into a financial instrument you can sell.

Banks have been doing that for decades and that's where things tend to go wrong. If you also add that governments might jump in financially, the larger banks don't have much to worry about.

I would say the risk for these banks is pretty low in that regard. It sucks that things are like this, but as long as there is demand for debt banks will continue to turn you into their slave at little to no risk.

[damberg]

One of the easiest thing is to write a contract between the Bitcoin borrower and lender. If it meets standards of their jurisdiction, the contract will be legally enforceable (raising chances for collateral liquidation if borrower defaults).

[Bezobraznike]

   It's correct that the number of bitcoin's is limited and the bank just can't print the number of a loan on your banking balance that way.
   In such case I think the bank should to buy as much bitcoins as it can. If such function will be taken by some banks then the price of bitcoin will fly high, cause of the demand will raise.
   I doubt that banks will work that way honestly. Cause first they will have to buy bitcoin's, which price is totally unstable. If the person who took a loan will bring back all bitcoin's he took and the price fell down sharply the bank will stay in minus. But again, if many banks will follow that the price for coins will raise constantly, due to demand.
   Hmm its interesting thing to think about really.

[erikoy]

It could be simplified if it will be done locally like bitcoin being partnered with a banks. As of now there are banks that has already accepted and integrated cryptocurrency and one of it that I know is the unionbank and is also been here in the Philippines. I never thought of this to happen but the unionbank has already stated that they are partnering the satoshi group.

[FanEagle]

I think the best case scenario would be making it a paper work like the banks do it with their regular loans but also having the governmental back for it as well. Like when I give you bitcoin and expect you to pay it back and than you do not than I have no power of claiming that loan from you.

However, let's say a bank gives you a loan and you refuse to pay it than they come to your door with cops to take away your stuff for a lot cheaper than they worth and sell your items to pay your loan for them. Which means if we can get that type of support for our crytpo loans from the government like giving the lenders cops to go get that money like mafia (which banks are actually mobs) than we can actually issue loans without any problems since it would be easy to reclaim it back.

[automaticmoney]

crypto currency and loans very difficult subject to handle even though we have escrow based transaction yet it is get back payments on time in this decentralized world is difficult

[Naida_BR]

crypto currency and loans very difficult subject to handle even though we have escrow based transaction yet it is get back payments on time in this decentralized world is difficult

Indeed. The only assurance that the guy borrows the money can give is to provide some valuable assets to the guy that borrows him the money.
In that case he will be obliged to send the money back.

[mazdafunsun]

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 am just wondering here. Lets assume that there is this 3rd person in addition to the guy who gives out the loans and the guy who takes it. All this guys have bitcoin addresses. So the 3rd guy is the one who is saying that this guy ( who is taking the loan) is stand up guy and will repay you, i vouch for him. THen all these 3 parties are tied together with smart contract and here you go you have a smart contract.

[pugman]

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.

Well in theory, banks just play with people's deposits, one person's deposit is another person's loan. Btw, commercial banks cannot print money, only central banks/Federal reserves can.
When an average Joe wants to lend bitcoins, he can sure lend, but it all comes down to how he wants to lend his money, the terms he lays down etc etc

What people usually would tend to do is get the borrower's personal details, verify it and then lend money. Also all borrow requests aren't fulfilled by the bank, so an average Joe isn't obligated to accept all his requests.

[stompix]

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.

This is true, but not everyone pays off their debt. In the US, for example, consumer debt is now over $4 trillion, and increasing. Include mortgages in that figure, and household debt is over $13 trillion, and increasing.

People often get angry about government's printing new money to pay their debts or increase spending or whatever. The stats suggest governments only account for about 3% of the new money entering circulation. The other 97% comes from banks making loans.

Wait a minute....
If people would pay their debt back, there would no money printed out of thin air.

So the real ones to blame for this are not actually the backs but the people who take the money and don't pay them back?  
You realize this is a pretty strange thing to say, especially in this topic where we already labeled banks as the evil of the universe:P

It could be simplified if it will be done locally like bitcoin being partnered with a banks. As of now there are banks that has already accepted and integrated cryptocurrency and one of it that I know is the unionbank and is also been here in the Philippines. I never thought of this to happen but the unionbank has already stated that they are partnering the satoshi group.

Putting online two ATMs that convert fiat to bitcoin does not mean the bank is accepting bitcoin deposits or has "integrated" cryptocurrency.Also, who the hell is this "satoshi group" ?

[zergenyt09]

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.

The way you just described, it' seems dumb. How old are you, 6? If you are an adult you wouldn't be saying that banks are creating money magically. When you take loans from banks, they are giving you the money from their own wallet and expecting you to pay it back within a giving time and also pay the interest. So the money is not being created magically and digits poured into your account balance. Even when you want to deposit money into your account, do you go there and tell them to create money magically? It's the money you give to them that is being kept and recorded for you.

[mitchr4]

One of the easiest thing is to write a contract between the Bitcoin borrower and lender. If it meets standards of their jurisdiction, the contract will be legally enforceable (raising chances for collateral liquidation if borrower defaults).

Such a contract will be very difficult for the borrowers to accept it even if it's me, let alone the borrower has offered the collateral. If he defaults to pay the loan the lender can still take the collateral with no punishment for the borrower. More clearly if there is already a collateral then there is no legal contract.

[joshy23]

One of the easiest thing is to write a contract between the Bitcoin borrower and lender. If it meets standards of their jurisdiction, the contract will be legally enforceable (raising chances for collateral liquidation if borrower defaults).

maybe that can be done by countries that have received crypto currency as the applicable currency but for countries that still prohibit savings and loan crypto currency transactions with bitcoin, of course it will not be possible

Still a difference between how the country will cater the entire crypto currency, with countries who embraced this market this particular practices will be able to be comply by enforce ruling inside the countries jurisdictions while out from this it will be hard to implement and hard to established any possible
rule outside the given premises.

[Nellayar]

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.

What if the person who loans and person who give the loan are came from different countries? I think it is also immeasurable to get the documents in order to be a collateral to the loan. I am also thinking about the payments. For example, I loan 10 bitcoins when its price is 10K dollars but I pay 10 bitcoins when the price is 3K dollars. I think it should provide some rules when we loan through bitcoin.

[Bagaji]

The only way you the lender can get your loan with interest is by way given out the loan to who have equivalent collateral of the sum of loan amount you give to the person.