[2014-07-15] Coindesk : ING: Future Bitcoin Protocol Should Include Central Bank

[bitbouillion]

Bankers realized that people won't depositing Bitcoins in a bank, because it's not needed for utility, security and store of value. Now they want some tweaks (control of supply), which forces people depositing them with a bank or lose value through inflation. 

[bitbouillion]

At some point I'm guessing someone's going to start trying to throw fractional reserve into the mix on a large scale and that's probably going to end badly.  

Fractional reserve will never work with Bitcoins.

I open a bank and offer contracts to pay customers 3% interest to deposit coins for a period of 1 year with no (or limited) option for withdraw. I then loan some or all of those coins out to other customers at a rate of 6%.

Voila, fractional reserve banking.

That's not fractional reserve banking.

Also, nominal interest rates are bogus for economic decisions. Why would someone borrow Bitcoins for 6%/year, when Bitcoin value goes up only 20%/year? The real interest rate will be 26%. If I can borrow Dollars for 6%/year, and the Dollar loses 2%/year, the real interest rate will be 4%.  Borrowing Bitcoins makes no sense economically.

[bitbouillion]

It's precisely fractional reserve banking.

Fractional-reserve banking is the practice whereby a bank holds reserves in an amount equal to only a portion of the amount of its customers' deposits to satisfy potential demands for withdrawals.

What you described is traditional money lending business (loans from prior deposits).

"Fractional reserve" is something different. In a nutshell: Banks leverage their reserves, they create e.g. $10 loans from $1 reserves. These loans become deposits through economic activities (e.g. somebody is buying a car on a loan and the seller will most likely deposit the money with a bank) to the most part (only a small portion of the cash remains in circulation). Depositors, who want to withdraw their money, get paid from the bank's reserves.  Now do the math. The bank can satisfy only a fraction of the deposits (less than $10, most likely $9) from their reserves ($1) - that's why it's called fractional reserve.  ("...a bank holds reserves in an amount equal to only a portion of the amount of its customers' deposits.." [quoted from your quote above]).

People don't always make sensible choices. https://bitcointalk.org/index.php?topic=73599.0

That's why it will fail.

[bitbouillion]

Nope, your deposits are locked for a year. Why they need reserves?

[davidgdg]

People put money in the bank for two reasons.

First to look after it. There is less need for this with BTC but there will still be some demand for it. But the publicly auditable nature of BTC means that firms that do this will be custodians rather than banks. So no fractional reserve banking there.

The second reason is to earn interest. This will apply to BTC just like anything else. So some amount of fractional reserve banking is inevitable with BTC. But as with gold, it is fundamentally constrained by the inability of central banks to print BTC. So the mischief of FRB is very limited under BTC. The market is a good discipline when it is allowed to function.

But if this stupid idea for a BTC printing algorithm were ever to take off (but HINT - IT WON'T!), we will be right back to square one.

Which is why the ING man is such a moron.

[Rygon]

I don't think everyone understands that this guy is talking about an algorithm (something that would be a part of the code) and not an actual central bank. I think it would be great to have an algorithm that could dynamically adjust coin generation based on the global supply and demand of the coin, which would damper price flucuations. But the issue to do it in a way that was clear and transparant, and couldn't be manipulated by miners, whales, exchanges, etc. It might not be possible because there's no obvious way to sample the supply and demand of bitcoin since that happens outside of the code, in exchanges or private transactions.

On that same note,  bitcoin would be just as useful even if it didn't have a 21M cap or halving every 4 years. The key isn't the total fixed supply, it's the predictability of the generation. It's factored into the determination of price, which is why the first bitcoin halving didn't have a significant effect on the price (Other than assuring the market that the network wouldn't break, lol). Bitcoin could have kept generating 50 coins/10 minutes forever, and bitcoin wouldn't lose any real capability. And prices would have still risen because the demand has far outpaced coin generation.

[marcus_of_augustus]

I don't think everyone understands that this guy is talking about an algorithm (something that would be a part of the code) and not an actual central bank. I think it would be great to have an algorithm that could dynamically adjust coin generation based on the global supply and demand of the coin, which would damper price flucuations. But the issue to do it in a way that was clear and transparant, and couldn't be manipulated by miners, whales, exchanges, etc. It might not be possible because there's no obvious way to sample the supply and demand of bitcoin since that happens outside of the code, in exchanges or private transactions.

On that same note,  bitcoin would be just as useful even if it didn't have a 21M cap or halving every 4 years. The key isn't the total fixed supply, it's the predictability of the generation. It's factored into the determination of price, which is why the first bitcoin halving didn't have a significant effect on the price (Other than assuring the market that the network wouldn't break, lol). Bitcoin could have kept generating 50 coins/10 minutes forever, and bitcoin wouldn't lose any real capability. And prices would have still risen because the demand has far outpaced coin generation.

... all these models suffer from a disconnect with reality. How do you measure and monitor the economy sufficiently accurately enough in a manner that is not prone to centralised failures?

You cannot feed inputs into a system that bases its utility on a distributed network, via a centralised measuring/monitoring signal and expect it to retain the robustness that makes it superior.

[bitbouillion]

The second reason is to earn interest. This will apply to BTC just like anything else.

There are always two parts of an equation. Who will borrow BTCs at a real rate of 100%? 

[gbooz]

 "....a bitcoin algorithm needs to be developed that “smoothly matches money supply and demand”." Will it be the BTC then?