Bitcoin Forum
October 22, 2019, 02:43:28 AM *
News: 10th anniversary art contest
 
   Home   Help Search Login Register More  
Pages: [1]
  Print  
Author Topic: Full reserve banking with fiat using a block chain  (Read 4532 times)
trilli0n
Newbie
*
Offline Offline

Activity: 48
Merit: 0


View Profile
March 21, 2014, 07:12:39 PM
Last edit: March 29, 2014, 02:40:20 PM by trilli0n
 #1

Full reserve banking with fiat using a block chain

Imagine a block chain acting as a ledger for a fiat currency such as USD or EUR. Fiat payments would be conducted analogously to cryptocurrency payments. Wallets would contain fiat money instead of cryptographic currencies. This post explores whether such a block chain can exist.

Rationale

Depending on its implementation, a fiat blockchain can inherit some of the properties from the bitcoin blockchain:

  • Fiat in the blockchain cannot be confiscated by a central authority;
  • Fiat in the blockchain cannot be frozen by a central authority;
  • Cheap and convenient payments, also cross-border;
  • Settlement of payments within max one hour;
  • Pseudonimity;
  • Difficult to trace;
  • Balance total is protected by cryptography.

Of course, some Bitcoin advantages are not inherited, such as:

  • Predictable and moderate inflation of the amount of currency units;
  • Currency units are themselves valuable, whereas fiat currency units are a proxy for fiat, and must be backed by physical fiat to retain their value;
  • Trustless, whereas a fiat blockchain requires some level of trust in fiat bankers.


Implementation mock-up

In a fiat block chain, there is no mining, and no block reward. Rather, there will only be transaction hashers, and the hashers are motivated by transaction fees only.

A fiat block chain must be provably 100% backed by reserves with as little trust as possible. Every currency unit on the block chain must exist physically in a safe. Although a fractional reserve block chain is possible, it is not considered here. Due to the nature of fiat, a fully decentralized and trustless implementation is not possible. Here we will try to explore how a fiat block chain can be implemented with as little as possible compromises to the advantages which the decentralized and trustless model offers.

In order to get fiat currency units on the fiat block chain, fiat money must be deposited and stored physically with a fiat banker. The fiat banker is authorized to issue fiat currency units on the block chain at the address of the depositor. For instance, a deposit of USD 100 would be carried out as follows: the depositor hands over a physical USD 100 bill to the fiat banker. The fiat banker releases USD 100 on the block chain at the address of the depositor. The fiat banker stores the USD 100 bill in a safe.

To prevent the fiat banker from releasing fiat on the block chain for which no reserves are held, a method is proposed to ensure that the fiat is provably held by the fiat banker. Although trust can not be fully removed, it can be reduced significantly. Whether it can be reduced sufficiently to make a fiat block chain feasible remains an open question.

The fiat banker stores bank notes in a bank safe. In our method, only a single bank note size is stored, such as USD 100 or EUR 50 bills. Depositing fractions of the standard bank note size is not possible. The fiat banker will therefore physically store USD 100 or EUR 50 bills only. This will facilitate prove of reserves.

Every bill has a unique serial number printed on it. When a fiat banker releases fiat on the block chain, it must be done such that the serial number of the bank note, as well as a unique reference or ID of the fiat banker is also verifiably released. This allows the depositor to verify that his bank note is correctly released on the block chain, although it would have no consequences for the depositor if it were not. That is: the serial number is released, but not tied to the address of the depositor. The depositor receives currency units that can be freely spent in fractions just like a cryptocurrency. The serial number is on the block chain for reference, as it facilitates prove of reserves. The reference of ID of the fiat banker can be a number, but it is also released. Together, the block chain stores that a bank note with a certain serial number has been deposited with a fiat banker with a certain ID. Thus, the block chain stores the serial numbers of every physical bill that has been deposited for every fiat banker.

A fiat banker naturally also serves withdrawals of fiat. A holder of fiat on the block chain can withdraw his units on the block chain by visiting a fiat banker and exchanging his balance on the block chain for physical bank notes. In the simplest example, if USD 100 is to be withdrawn, the withdrawer visits the fiat banker and sends the USD 100 to the address of the fiat bank. The fiat bank then takes a physical USD 100 bill from its stock and hands it over to the withdrawer. However, the transaction is conducted such that the serial number of the bank note that must be returned by the fiat banker is determined randomly by the block chain. The withdrawer sends a special withdrawal transaction to the fiat banker. The block chain knows all the serial numbers of all previously deposited bank notes. The block chain randomly defines which bank note must be returned to the withdrawer. The fiat banker must retrieve the physical bank note as randomly determined by the block chain from the safe and hand it to the withdrawer.

This scheme makes it very difficult for a fiat banker to cheat. If the fiat banker would release bank notes on the block chain for which the physical notes do not exist, then this will become clear very quickly if withdrawers find that the fiat banker is not able to produce the bank notes with the serial numbers as demanded by the block chain. In fact, if the fiat banker fails to produce the bank notes as demanded by the block chain, it can no longer be trusted, and depositors should no longer deposit with this fiat banker.

A rogue fiat banker is able to fund an account on the block chain using serial numbers of bills that are not in his possession. Next, the rogue fiat banker can send his balance over to a honest fiat banker and receive physical bank notes in return for his unbacked balance. This will only be discovered as soon as anyone tries to withdraw fiat with the rogue fiat banker, at which point it would become clear that the rogue banker can not produce the bills with the serial numbers as demanded by the block chain. By then however it is already too late.

To mitigate such schemes, the fiat banker must have additional incentives to remain honest. This is an open point, although it can probably be resolved by legal means or by demanding fiat bankers to deposit an amount in escrow in order to be allowed to act as a fiat banker. Also, limits can be imposed on a fiat banker as to how much fiat can be put on the block chain, which in turn can depend on the type of legal measures or height of the deposit in escrow, or both.

Since a deposits and withdrawals are in units of a chosen bank note, fractional amounts can not be withdrawn. This is easy to circumvent, however. For instance, to withdraw a fractional amount, the withdrawer can add an amount to reach a multiple of the bank note amount. For instance, to withdraw USD 143, the withdrawer would send USD 143 to the address of the fiat banker, as well as hand him USD 57 in cash. The fiat banker then asks the block chain to release two USD 100 bank notes, and hands them to the withdrawer. Of course, the withdrawer is supposed to verify the serial numbers on the bank notes with the block chain generated numbers.

The idea of a fiat block chain presented here is very rudimentary and only serves as a jumping point for further exploration, or alternatively, dismissal.
Advertised sites are not endorsed by the Bitcoin Forum. They may be unsafe, untrustworthy, or illegal in your jurisdiction. Advertise here.
1571712208
Hero Member
*
Offline Offline

Posts: 1571712208

View Profile Personal Message (Offline)

Ignore
1571712208
Reply with quote  #2

1571712208
Report to moderator
analau
Member
**
Offline Offline

Activity: 69
Merit: 10


View Profile
March 21, 2014, 07:14:16 PM
 #2

dismissal Smiley
Tron
Full Member
***
Offline Offline

Activity: 588
Merit: 107


View Profile
March 21, 2014, 07:51:54 PM
 #3

I see one advantage in this setup, and several weaknesses.

Advantage: The ability to send fiat currency quickly to anywhere in the world assuming you have a network of 'fiat bankers'.

Weaknesses:  The Bitcoin protocol was brilliantly designed to solve the problem of incentive to secure the network, with the reward being some of the value from the network.  By unlinking the two, there is no incentive for securing the network (mining).   The other weakness is that you have security risk with the fiat bankers which you may solve, but it is very similar to the risk that exchanges pose at the moment.

The primary problem you seem to be solving is the volatility, and that can be solved more easily by having many exchanges like Coinbase, BTC-e, Bitstamp, and bitcoin ATMs.

If you don't want the volatility, hold fiat.  When you need to send value  -- Exchange to bitcoin, send, and let the receiver of the value decide whether to transfer back to fiat, or hold the value in bitcoin. 

Fiat and bitcoin (the currency/commodity) both have risk.  Ignoring any security issues for the moment, fiat can be 'quantitatively eased' to a lower value (reduced purchasing power), while bitcoin currently has extreme volatility and the value goes up and down based on the news of the day.

Tron
Founder, CoinCPA
trilli0n
Newbie
*
Offline Offline

Activity: 48
Merit: 0


View Profile
March 21, 2014, 08:11:18 PM
 #4

The fiat blockchain enables full reserve banking. The units on the block chain are fully backed by the reserves in the safes of fiat bankers. Of course, everything depends on the honesty of the fiat banker. However, the current situation in banking is much worse. The current-day, traditional fiat banker keeps only a fraction of its deposits, the rest is loaned. If only a fraction of these loans default, the bank defaults and the depositors will lose their money for as far as it is not insured.
Beliathon
Hero Member
*****
Offline Offline

Activity: 784
Merit: 1000


https://youtu.be/PZm8TTLR2NU


View Profile WWW
March 21, 2014, 08:25:43 PM
 #5

Full reserve banking with fiat using a block chain

Imagine a block chain acting as a ledger for a fiat currency such as USD or EUR.
Ye gods!!


Remember Aaron Swartz, a 26 year old computer scientist who died defending the free flow of information.
trilli0n
Newbie
*
Offline Offline

Activity: 48
Merit: 0


View Profile
March 21, 2014, 08:36:28 PM
Last edit: March 21, 2014, 09:03:21 PM by trilli0n
 #6

I see one advantage in this setup, and several weaknesses.

Advantage: The ability to send fiat currency quickly to anywhere in the world assuming you have a network of 'fiat bankers'.

For sending and receiving funds, the fiat bankers network has no function. The fiat bankers only come into play when putting fiat on or removing fiat from the block chain. As an incentive, they can ask a fee for these transfers.

Quote
Weaknesses:  The Bitcoin protocol was brilliantly designed to solve the problem of incentive to secure the network, with the reward being some of the value from the network.  By unlinking the two, there is no incentive for securing the network (mining).

The incentive is still there: transaction fees that the miners, or rather: hashers receive when solving a block. This is equal to the situation that bitcoin will be in when all bitcoins are mined.

Quote
The other weakness is that you have security risk with the fiat bankers which you may solve, but it is very similar to the risk that exchanges pose at the moment.

Yes. But there are many ways to mitigate these risks, just as regular banks mitigate these risk: FDIC insurance, for instance, and traditional regulation. Also consider that regular banks require a much higher level of trust than a block chain based fiat bank would require.

Quote
The primary problem you seem to be solving is the volatility, and that can be solved more easily by having many exchanges like Coinbase, BTC-e, Bitstamp, and bitcoin ATMs.

If you don't want the volatility, hold fiat.  When you need to send value  -- Exchange to bitcoin, send, and let the receiver of the value decide whether to transfer back to fiat, or hold the value in bitcoin.
The fiat block chain transfers some of the advantages of bitcoin to fiat. For instance, the fiat on your address cannot be confiscated or frozen as it can when it sits in a bank account. In other words, a single person can no longer be singled out as a target to confiscation or account freezing. Also, it is more anonymous than a bank account if proper precautions are taken, just as with bitcoin in its current state.

Quote
Fiat and bitcoin (the currency/commodity) both have risk.  Ignoring any security issues for the moment, fiat can be 'quantitatively eased' to a lower value (reduced purchasing power), while bitcoin currently has extreme volatility and the value goes up and down based on the news of the day.

Yes. This remains the main distinction between bitcoin and fiat, and which is my opinion bitcoin is superior to fiat as it can not be inflated. However, I find it interesting to note that some of the properties of bitcoin can be transferred to fiat as well.


TrillionBTC
Newbie
*
Offline Offline

Activity: 28
Merit: 0


View Profile
March 21, 2014, 09:02:48 PM
 #7

Hmmmm..... First things first I like the name.  Wink

Here's the deal.... This already exists it's called the International Banking Community.

Since most fiat is digital and digital numbers in a computer are increase and decreased in the banking community based on people Depositing and  making Withdrawals this by definition is what you just described.

It's here, it exists, and therefore one main reason Bitcoin and other Cryptocurrencies are so much more attractive. I for one am tired of the control the bankers have over my money and more importantly the government regulations placed over them.
Dr.Zaius
Newbie
*
Offline Offline

Activity: 28
Merit: 0


View Profile
March 21, 2014, 09:30:18 PM
 #8

This is impossible as fiat is limited by its double entry accounting system. A third party will ALWAYS have to store fiat. Even in it's purest form, fiat money is still someone else's liability. The value of that liability is directly related to the integrity of the asset's "backing" it. Fiat money as practiced in 2014 cannot exist without banking. Bitcoin characteristics are completely different, bitcoin monetary system can function without any banks. I don't get why people constantly compare 500 year old liability money to tripple-entry asset money.
jonald_fyookball
Legendary
*
Offline Offline

Activity: 1302
Merit: 1002


Core dev leaves me neg feedback #abuse #political


View Profile
March 22, 2014, 05:48:05 AM
 #9

This is impossible as fiat is limited by its double entry accounting system. A third party will ALWAYS have to store fiat. Even in it's purest form, fiat money is still someone else's liability. The value of that liability is directly related to the integrity of the asset's "backing" it. Fiat money as practiced in 2014 cannot exist without banking. Bitcoin characteristics are completely different, bitcoin monetary system can function without any banks. I don't get why people constantly compare 500 year old liability money to tripple-entry asset money.

Interesting point.  But what if the bank is storing the paper notes physically?

twiifm
Hero Member
*****
Offline Offline

Activity: 784
Merit: 500



View Profile
March 25, 2014, 05:23:12 AM
 #10

The fiat blockchain enables full reserve banking. The units on the block chain are fully backed by the reserves in the safes of fiat bankers. Of course, everything depends on the honesty of the fiat banker. However, the current situation in banking is much worse. The current-day, traditional fiat banker keeps only a fraction of its deposits, the rest is loaned. If only a fraction of these loans default, the bank defaults and the depositors will lose their money for as far as it is not insured.

About fractional reserve.   Banks do overnight loans to each other to balance their books.   If one one bank is runned they have to borrow from another bank.  If they become insolvent they get bought out.

If all banks get runned they turn to the Fed as lender of last resort. Theres nothing wrong with fractional reserve.  

The crisis we face now has more to do with how banking and finance became too advanced for current regulations.   2008 crisis has more to do w derivatives and shadow banking.

Bitcoins don't address any of this only regulations will. Its not about honest bankers.   Its about how bankers and regulators play cat and mouse

I think the only interesting thing about bitcoin is the tech minus the amateur economics and libertarian/ anarchist politics.   If anything the banks and govt will develop a crypto for transfering money / making payments digitally.  Thats what consumers care about, not politics or speculating.   Im not a tech so I don't know if its feasible or not





twiifm
Hero Member
*****
Offline Offline

Activity: 784
Merit: 500



View Profile
March 25, 2014, 05:31:26 AM
 #11

This is impossible as fiat is limited by its double entry accounting system. A third party will ALWAYS have to store fiat. Even in it's purest form, fiat money is still someone else's liability. The value of that liability is directly related to the integrity of the asset's "backing" it. Fiat money as practiced in 2014 cannot exist without banking. Bitcoin characteristics are completely different, bitcoin monetary system can function without any banks. I don't get why people constantly compare 500 year old liability money to tripple-entry asset money.

Isn't the liabilty in bonds?   Govt debt is liability,  no?
jonald_fyookball
Legendary
*
Offline Offline

Activity: 1302
Merit: 1002


Core dev leaves me neg feedback #abuse #political


View Profile
March 25, 2014, 04:26:11 PM
 #12



The fiat blockchain enables full reserve banking. The units on the block chain are fully backed by the reserves in the safes of fiat bankers. Of course, everything depends on the honesty of the fiat banker. However, the current situation in banking is much worse. The current-day, traditional fiat banker keeps only a fraction of its deposits, the rest is loaned. If only a fraction of these loans default, the bank defaults and the depositors will lose their money for as far as it is not insured.

About fractional reserve.   Banks do overnight loans to each other to balance their books.   If one one bank is runned they have to borrow from another bank.  If they become insolvent they get bought out.

If all banks get runned they turn to the Fed as lender of last resort. Theres nothing wrong with fractional reserve.  

The crisis we face now has more to do with how banking and finance became too advanced for current regulations.   2008 crisis has more to do w derivatives and shadow banking.

Bitcoins don't address any of this only regulations will. Its not about honest bankers.   Its about how bankers and regulators play cat and mouse

I think the only interesting thing about bitcoin is the tech minus the amateur economics and libertarian/ anarchist politics.   If anything the banks and govt will develop a crypto for transfering money / making payments digitally.  Thats what consumers care about, not politics or speculating.   Im not a tech so I don't know if its feasible or not


Nothing wrong with fractional reserve?  That may be your opinion, but there are many who disagree.

http://wiki.mises.org/wiki/Criticism_of_fractional_reserve_banking

Erdogan
Legendary
*
Offline Offline

Activity: 966
Merit: 1000



View Profile
March 25, 2014, 06:35:22 PM
 #13

To OP: A bitcoin like system, where the central bank controls the supply, could be useful.

A cryptodollar could easily be pegged to the dollar, since the central bank controls the supply of both.

Advantages to the user could be like using cash, except the cryptodollar could easily be transfered with no third party, reduced cost compared to credit cards, increased safety compared to transfer of deposits. Increased anonymity.

System advantages: Seignorage like now with bills and coins, or even better. System safety with mining distributed to a geographically distributed set of equally powered mining centers under central control.

Such a coin, with government support, could expand faster than bitcoin could. It could take over all other fiats easily.

Advantages to USA (the issuing country) would be even greater than the current situation.

The ratio of base money to credit could be turned on its head, removing the risk of a credit crunch.

Yeah, it is possible, and someone will certainly propose it at some point, but it has some of the disadvantages of the current fiat system, and I think we are better served with bitcoin.

twiifm
Hero Member
*****
Offline Offline

Activity: 784
Merit: 500



View Profile
March 25, 2014, 08:54:10 PM
 #14



The fiat blockchain enables full reserve banking. The units on the block chain are fully backed by the reserves in the safes of fiat bankers. Of course, everything depends on the honesty of the fiat banker. However, the current situation in banking is much worse. The current-day, traditional fiat banker keeps only a fraction of its deposits, the rest is loaned. If only a fraction of these loans default, the bank defaults and the depositors will lose their money for as far as it is not insured.

About fractional reserve.   Banks do overnight loans to each other to balance their books.   If one one bank is runned they have to borrow from another bank.  If they become insolvent they get bought out.

If all banks get runned they turn to the Fed as lender of last resort. Theres nothing wrong with fractional reserve.  

The crisis we face now has more to do with how banking and finance became too advanced for current regulations.   2008 crisis has more to do w derivatives and shadow banking.

Bitcoins don't address any of this only regulations will. Its not about honest bankers.   Its about how bankers and regulators play cat and mouse

I think the only interesting thing about bitcoin is the tech minus the amateur economics and libertarian/ anarchist politics.   If anything the banks and govt will develop a crypto for transfering money / making payments digitally.  Thats what consumers care about, not politics or speculating.   Im not a tech so I don't know if its feasible or not


Nothing wrong with fractional reserve?  That may be your opinion, but there are many who disagree.

http://wiki.mises.org/wiki/Criticism_of_fractional_reserve_banking


I don't subscribe to Austrian economics.   Its too much ideology without a empirical foundation.   I prefer MMT
Pages: [1]
  Print  
 
Jump to:  

Sponsored by , a Bitcoin-accepting VPN.
Powered by MySQL Powered by PHP Powered by SMF 1.1.19 | SMF © 2006-2009, Simple Machines Valid XHTML 1.0! Valid CSS!