Is there any change that protect crypto from fractional reserve style stuff?

[inashed]

Fractional reserve banking type of things can be done with fungible items. Is there any change to bitcoin (or bitcoin style crypto) that would make fractional reserve banking or something else, impossible or harder to exist?

As some example, would Demurrage make it harder to happen?

EDIT: Reposted the question from wikipedia ( https://en.wikipedia.org/wiki/Wikipedia:Reference_desk/Humanities ) because I saw it would be a better place to ask those questions.~~~~

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[jackg]

Realistically, there might be nothing stopping a similar system happening with crypto but the deflationary nature does stop it from happening exponentially quite a bit and limits the margins of the companies that can make use of it (they'd probably have to make the reserve the funds that they don't expect to just be moved off at some point - or a float they won't go below).

The fact you can readily and easily remove bitcoin goes somewhere to stopping the fractional reserve system from controlling it imo (the current banking system doesn't really allow for that as you're transferring funds between businesses fairly close to each other or have limits on how much cash you can withdraw at once from a certain branch).

[Upgrade00]

Is there any change to bitcoin (or bitcoin style crypto) that would make fractional reserve banking or something else, impossible or harder to exist?

What I can think of is the volatility and the asset it is valued against. If Bitcoin is operated as an asset which is calculated simply on its value, then a fractional reserve system could work, as money loaned in Bitcoin would be payable in Bitcoin.
So if Mr A deposits 1.5BTC, and the bank keeps 0.3BTC, while lending out the remainder to Mr B, who is expected to repay the 1.2BTC as well as the interest on it. Volatility would not be a factor as the value is of itself.

As some example, would Demurrage make it harder to happen?

As a scenario, how do you imagine demurrage can affect its usability?

[o_e_l_e_o]

Realistically, there might be nothing stopping a similar system happening with crypto

In fact, it has already happened in the past. Huobi and OKCoin have both been caught using users' deposits to invest in various high risk vehicles, meaning that they were no longer holding all the coins required to recover all their deposits, and were therefore fractional reserve: https://cointelegraph.com/news/two-chinese-exchanges-help-themselves-to-user-funds. I would bet every bitcoin I own that this practice is still ongoing on a number of exchanges. We also know other coins such as Tether are not backed up 1-to-1 as was previously claimed and are therefore fractional reserve.

As long as we have users trusting third party exchanges or web wallets with their coins, then we will always have the potential for a fractional reserve system to the risk of those users in question. The only way to avoid being subjected to fractional reserve is to hold your own coins. The only way to completely stop fractional reserve systems altogether is if everybody held their own coins.

[inashed]

As some example, would Demurrage make it harder to happen?

As a scenario, how do you imagine demurrage can affect its usability?

The bank or whateaver lose money (like everyone else) with the demurrage and reduce the amount of money they have with itself to give back to people when they request "their money" back.

[lovesmayfamilis]

Fractional reserve banking type of things can be done with fungible items. Is there any change to bitcoin (or bitcoin style crypto) that would make fractional reserve banking or something else, impossible or harder to exist?

As some example, would Demurrage make it harder to happen?

I think the phrase copied from Wikipedia needs an urgent addition of the source. You have been on the forum since 2017, and it’s a shame that you still don’t know about those little things, the ignoring of which is fraught with a permanent ban for your account.
Moreover, you expose everyone who answers your question of concern to the deletion of their posts along with your topic.


https://en.wikipedia.org/wiki/Wikipedia:Reference_desk/Humanities

[Kakmakr]

The thing with Fractional reserve practices is this... The Banks created money out of nothing, because Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers. Source : Wikipedia

You cannot create bitcoins out of nothing, because Bitcoin has a fixed supply and that cannot be changed without a majority vote from full nodes. They will never allow that, because that will reduce the value of the bitcoins they own now.  

[odolvlobo]

Fractional reserve banking type of things can be done with fungible items. Is there any change to bitcoin (or bitcoin style crypto) that would make fractional reserve banking or something else, impossible or harder to exist?

Bitcoin's fixed supply does limit FRB compared to fiat because the risk of collapse is greater as the reserve ratio goes lower. With fiat, there is an unlimited supply of money available to prevent a collapse so the reserve ratio can be 0.

[Silberman]

The thing with Fractional reserve practices is this... The Banks created money out of nothing, because Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers. Source : Wikipedia

You cannot create bitcoins out of nothing, because Bitcoin has a fixed supply and that cannot be changed without a majority vote from full nodes. They will never allow that, because that will reduce the value of the bitcoins they own now.  

It is not as simple, banks could do to bitcoin what they did to gold.

Step one: begin to accept gold and encourage people to deposit their gold with you arguing you can secure it properly while they cannot.
Step two: as this practice becomes popular people for the most part begin to use the certificates they got from the bank as money instead of gold.
Step three: since the amount of people asking for their gold back is low then keep a small amount in reserve while loaning the rest and multiply the profits of the bank, also known as fractional reserve banking.

And since this is something that could happen off the network there is nothing protecting bitcoin for something like this happening, the only difference is that the bitcoin network will keep on existing, so those which do not fall for this gambit will still be able to use their bitcoin as they want, but almost all bitcoin deposited on banks will never see the light of the day again as just an additional step is needed to make all those certificates fiat money by suspending your ability to exchange them for bitcoin.

[Hydrogen]

Fractional reserve banking type of things can be done with fungible items. Is there any change to bitcoin (or bitcoin style crypto) that would make fractional reserve banking or something else, impossible or harder to exist?

Fractional reserve banking has extensive networks of credit background checks, agents for repossession of goods, government mandated subsidies for home and student loans. Et cetera. It has had decades to develop entire industries, regulation and laws which revolve around and support its native loan markets.

Bitcoin and cryptocurrencies in the present day, lack that support infrastructure. Which makes it very difficult, if not impossible, for a crypto based asset to do basic background or credit checks to know what rates or risk factors should accompany potential loan candidates. These are known issues cryptocurrencies have struggled with for many years. Without good solutions being found.

In past years, small crypto start ups tried to use ID based certification as a format for legitimizing loans. But I think most know by now there are websites and entire industries on the internet which are devoted towards making and selling fake IDs for "entertainment or humor purposes" only.

Banks and fractional reserve based industries have access to financial networks and credit scores, along with methods of legally forcing loan dodgers to eventually pay up. Crypto assets have always lacked that support infrastructure which has always prevented it from penetrating home, auto, personal and business loan markets. All of which are dominated by fractional reserve institutions.

[o_e_l_e_o]

And since this is something that could happen off the network there is nothing protecting bitcoin for something like this happening, the only difference is that the bitcoin network will keep on existing, so those which do not fall for this gambit will still be able to use their bitcoin as they want, but almost all bitcoin deposited on banks will never see the light of the day again as just an additional step is needed to make all those certificates fiat money by suspending your ability to exchange them for bitcoin.

We already see places like Robinhood and PayPal allowing users to purchase "bitcoin", except the only thing they can do with that bitcoin is hold it and then sell it back to the platform in question, meaning there is absolutely no way for the user to know whether or not the platform is actually holding any bitcoin or just giving them price exposure. It won't be long before there is an entire sector of people paying each other on one of these platforms or maybe an exchange such as Coinbase, sending "bitcoin" from their centralized account to a merchant's centralized account, without ever making an onchain transaction and without ever knowing if the bitcoin in question actually exists.

Crypto assets have always lacked that support infrastructure which has always prevented it from penetrating home, auto, personal and business loan markets. All of which are dominated by fractional reserve institutions.

And as more and more people sign up to centralized exchanges and hand over all their personal information, including things like employment status and yearly income which exchanges are now asking for, then crypto exchanges will have access to all the same information that fiat banks have access to. I won't be surprised when we start seeing crypto exchanges performing credit checks on their customers before offering them services.

[Ucy]

Maybe just make it hard for any company or bank to hold and solely control other people's Bitcoin. That will probably mean encouraging only non-custodial/decentralized exchanges and platforms.
In the end, It still boils down on sticking to Bitcoin or True Cryptocurrency principles

[o_e_l_e_o]

Maybe just make it hard for any company or bank to hold and solely control other people's Bitcoin.

How can this possibly be enforced though?

We can encourage decentralized platforms and "Not your keys, not your coins" as much as a we want. But even after all the centralized exchange hacks, leaks, losses, scams, privacy invasion, KYC requirements, spying, surveillance, fractional reserve, accounts being locked, transactions being frozen, coins being seized and on and on, the number of people using such centralized services continues to grow. There will always be people who don't care about the decentralized nature of bitcoin and are just here to try to make profit, and will use any centralized platform which promises them unsustainable growth or returns. And there will always be people who despite the tens of thousands of users who have lost funds because of centralized platforms, will continue to use them to store their coins.

The only possible way to stop people using centralized platforms altogether would be to outright ban them, and regardless of whether or not you think such an outcome would be a good thing, we absolutely shouldn't be looking for more government regulation or laws regarding the bitcoin ecosystem.

[paxmao]

Yes, it is called education, common sense and incentives. Fractional reserve could be something like tether backed by USD

Seriously, good crypto should be limited and there is no way you are going to accept someone lending you bitcoin with a "bitcoin certificate". If you know your crypto bitcoin means bitcoin in your wallet address and with your own keys. There is no way you can borrow more than it exists if you have taken even the minimum required time to understand what you are doing.

[o_e_l_e_o]

Seriously, good crypto should be limited and there is no way you are going to accept someone lending you bitcoin with a "bitcoin certificate".

Is this not exactly what happens with people holding tokenized bitcoin, wrapped bitcoin, bitcoin on Ethereum, on Tron, on Binance Chain, or any of the other "not actually bitcoin" bitcoin tokens? Someone, often anonymous, promises to pay you real bitcoin in return for your fake bitcoin.

There is no way you can borrow more than it exists if you have taken even the minimum required time to understand what you are doing.

If you actually hold the bitcoin yourself, sure, but if it is tied up in layers of DeFi nonsense or something similar, wrapped up in altcoins, stuck in smart contracts, held by third parties, etc., then all that goes out the window. As I said above, the only way to avoid fractional reserve altogether would be for everyone to hold their own coins, but we both know that's never going to happen.

[inashed]

Seriously, good crypto should be limited and there is no way you are going to accept someone lending you bitcoin with a "bitcoin certificate". If you know your crypto bitcoin means bitcoin in your wallet address and with your own keys. There is no way you can borrow more than it exists if you have taken even the minimum required time to understand what you are doing.

Isnt el salvador chivo wallet, fractional reserve style wallet as long you are trading from chivo wallet to chivo wallet?
If that is true (the fractional reserve stuff would be used to give people their 30 dollars in BTC at chivo wallet, they are giving people to make sure they try it), people already accepted fractional reserve.

[Darker45]

Is there any change to bitcoin (or bitcoin style crypto) that would make fractional reserve banking or something else, impossible or harder to exist?

Yes, there is. Fractional reserve banking is a feature of the traditional banking system. If you strictly follow Bitcoin's revolutionary banking philosophy, this old feature will no longer work. Why? Simply because, with Bitcoin, your funds are under your sole control and ownership. You are your own bank with Bitcoin. No other person or institution has the access to your funds.

Fractional reserve banking is really a system which legally allows banking institutions to fool the people, to play with their money, and creates wealth out of it. If in the process they took too much risk and failed, they could simply declare bankruptcy and wait for the government to bail them out. The traditional banking system really sucks!

[mu_enrico]

Even if the total supply of a particular coin, let's say BTC, is fixed, anyone can still create altcoins derived from BTC. You know there is wBTC which advertised 1:1 (*cough* like tether). In reality, no one can stop these coins and similar fractional reserve (FR) system to exist. Even your BTC on exchange is not secure from FR practice. So no, crypto won't eradicate FR in that sense.

But, the one that matters the most is FR by central banks. There's no escape from it. In bitcoin world, you can opt-out by not participate in buying wrapped tokens and always store your coins in your non-custodial wallet.

[Silberman]

Even if the total supply of a particular coin, let's say BTC, is fixed, anyone can still create altcoins derived from BTC. You know there is wBTC which advertised 1:1 (*cough* like tether). In reality, no one can stop these coins and similar fractional reserve (FR) system to exist. Even your BTC on exchange is not secure from FR practice. So no, crypto won't eradicate FR in that sense.

But, the one that matters the most is FR by central banks. There's no escape from it. In bitcoin world, you can opt-out by not participate in buying wrapped tokens and always store your coins in your non-custodial wallet.

If the inflation gets out of control and we get a world with hyperinflation all over the place I would not be surprised if governments back their fiat currencies with a combination of gold, silver and bitcoin in order to try to appease people and control the inflation, this will be a last resource kind of thing because this is the last option central banks want to take, but after some time they will justify to print more money than whatever assets they have in reserve creating fiat currencies once again, and until people realize this sleight of hand by the governments and do something about it then they are going to keep using it.

[stompix]

Isnt el salvador chivo wallet, fractional reserve style wallet as long you are trading from chivo wallet to chivo wallet?

Not necessarily.
It could be and it could not be, since it's working its balance internally and we don't have any information on this you can assume it to be either way, it's a matter of trust.

But in Salvador cases, I would actually suspect the opposite happening, with the government not actually liquidating coins and using a sort of $ fractional reserve to pump up the price, it would make total sense from their point of view since they would be stocking on BTC on debt fiat.

If you strictly follow Bitcoin's revolutionary banking philosophy, this old feature will no longer work. Why? Simply because, with Bitcoin, your funds are under your sole control and ownership. You are your own bank with Bitcoin. No other person or institution has the access to your funds.

Yeah right in theory, in reality...

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