Dynamic bank syndicate bonds/funds through GLBSE -- seeking thoughts.

[Kluge]

A few of us lenders have issued deposits, more-or-less in the form of CDs. I don't think it works very well - at least not for me, who rarely has any reserves. I've had an instance where someone wanted to withdraw, but I don't have sufficient funds and could only partially pay when requested (fortunately, he was very understanding). With slim margins between interest rates on CDs and the very high default risk of lending through this board, permitting "dynamic" withdrawals of funds does not seem profitable if I also need to keep reserves in an amount to pay off deposits, especially with a few people buying CDs of large value. Due to BTC being so new, and with a large "wealth disparity" in the community, we deal with very low volume, and often in large amounts.

Traditional banks are able to have the best of both worlds due to the large volume of funds they deal with -- they practice what's known as fractional reserve banking where they set aside a large chunk of deposits out in the form of liquid reserves, and can get through with profit because they pay an insignificant amount of interest to deposit-holders and are able to offer services like ATM cards, checking, online banking, etc (and again, these are only possible when allowing "dynamic" withdrawals by depositors). Combining both overhead and interest, banks typically only pay the equivalent of ~3-6% APY.


I was thinking of solutions, and the easiest would be to simply disallow large deposits. But, there are not that many people interested in trusting their coins to someone online, and those who are tend to deposit large amounts -- that solution cuts us off to a lot of funds we could be profiting off of by reinvesting in the community, likely to the extent that accepting deposits is more a hassle than worth. Instead - what if we we listed bonds or 'fund shares' through something like GLBSE?


Two implementations discussed which may bring a good result:

Bonds -- we issue bonds as needed. We set a maturity date something like a year or two in the future, or could eschew hard maturity dates altogether and just promise to repay them "eventually." These bonds cannot be sold back to the banking syndicate prior to the maturity date, but they can be easily bought and sold on GLBSE, likely making them a fairly liquid investment. I would expect these to pay something like .4% of principal each week in dividends (~23% APY). No voting occurs, except perhaps something relevant to something like a settlement price were we to want to do something like buy back bonds early. Assuming you trust the lenders involved, this is pretty risk-free.

"Fund" shares -- we issue IPO shares to raise funds. Shares never mature until bought back by the banking syndicate, but can be easily bought and sold through GLBSE. Voting would occur for major investments. Profits and losses could be split, with losses rolling over, and dividends paid each week if applicable. I'd expect fund managers to take something like a 25% cut of the profits, receiving nothing if there are losses, or they could even be required to personally pay a % of losses toward the losses set to rollover to enforce accountability.


I only discussed this with one other person. I'm sure we missed some decent alternatives. Hoping to hear others' thoughts!

[brendio]

This is starting to sound like what I had in mind when I posted this thread on the GLBSE forum.

My plan for Bitcoin Investment Bank (BIB) was to offer various bonds and equity and have multiple "loan officers", who would be required to lodge a certain amount of capital and would get commission on loan profits, but also bear a certain amount of loss in the case of defaults (This would be to help keep the loan officers accountable for the loans they write and to give a real incentive for them to avoid loaning to scammers.).

With bonds, I would see no problem with the syndicate trading its own bonds (perhaps with a monthly report of trade for disclosure). This would allow it to provide liquidity (and profit from the spread) as well as manage its capital requirements. For example, if it has a month in which it doesn't have many loans outstanding, it can buy back its own bonds to save on the interest it needs to pay.

Various structures for bonds are possible. You just need to specify it in the contract. See for example my BIB.goat bond for a hybrid structure with no fixed term, but with a step-up date after which interest payable increases. This provides flexibility for the bond issuer to either redeem the bond on this date or pay higher interest afterwards to compensate bond holders for the longer maturity.

[Kluge]

This is starting to sound like what I had in mind when I posted this thread on the GLBSE forum.

My plan for Bitcoin Investment Bank (BIB) was to offer various bonds and equity and have multiple "loan officers", who would be required to lodge a certain amount of capital and would get commission on loan profits, but also bear a certain amount of loss in the case of defaults (This would be to help keep the loan officers accountable for the loans they write and to give a real incentive for them to avoid loaning to scammers.).

With bonds, I would see no problem with the syndicate trading its own bonds (perhaps with a monthly report of trade for disclosure). This would allow it to provide liquidity (and profit from the spread) as well as manage its capital requirements. For example, if it has a month in which it doesn't have many loans outstanding, it can buy back its own bonds to save on the interest it needs to pay.

Various structures for bonds are possible. You just need to specify it in the contract. See for example my BIB.goat bond for a hybrid structure with no fixed term, but with a step-up date after which interest payable increases. This provides flexibility for the bond issuer to either redeem the bond on this date or pay higher interest afterwards to compensate bond holders for the longer maturity.

Good ideas! The step-up idea in particular is interesting. Without borders, legal enforcement is extremely difficult -- transparency is absolutely essential. I was wondering about the problem of having multiple fund managers or loan officers, too. Multi-sig transactions in Bitcoin could help fight against rogue transactors. With two co-operators, for instance, the person responsible creating transactions would need to have the other operator sign on the transaction for it to go through (and vice-versa - the wallet-holder needs to agree the transaction's appropriate by creating it).

[Meni Rosenfeld]

I was thinking of solutions, and the easiest would be to simply disallow large deposits. But, there are not that many people interested in trusting their coins to someone online, and those who are tend to deposit large amounts -- that solution cuts us off to a lot of funds we could be profiting off of by reinvesting in the community, likely to the extent that accepting deposits is more a hassle than worth.

A similarly easy, and much more effective solution is to limit withdrawal rate per person. For example you could say withdrawals are limited to 25 BTC per day. So someone who wants to deposit 500 BTC will be accepted with open arms, but will do so with the understanding that it may take up to 20 days to withdraw everything.

Instead - what if we we listed bonds or 'fund shares' through something like GLBSE?

Bonds

Also a good idea. But its main advantage, the liquidity provided by GLBSE, might only be realized when GLBSE gains in popularity (which might be brought about by GLBSE 2.0), and with relatively large lenders. Otherwise, I can see how someone wanting to exit the investment by selling on GLBSE would suffer significant slippage. (Bidding on one's own bonds could mitigate this, but is not easier than having reserves from which to withdraw CDs.)

"Fund" shares

Not a fan. It's much easier to trust one's honesty in honoring the terms of a bond, than his competence in running a successful lending business.

[copumpkin]

With slim margins between interest rates on CDs and the very high default risk of lending through this board, permitting "dynamic" withdrawals of funds does not seem profitable if I also need to keep reserves in an amount to pay off deposits, especially with a few people buying CDs of large value.

Then why not disallow at-will withdrawals (or impose penalties for them)? "Real-world" CDs have predetermined deposit terms, ranging from a few months to several years, with commensurate returns. Those kinds of time frames probably wouldn't work with bitcoin, due to the massive currency risk, but I could see myself agreeing to leave you coins for a couple of months if the returns were right.