[2014-08-25] Why There Should Be A Bitcoin Central Bank

[patricktim]

http://www.forbes.com/sites/ericxlmu/2014/08/24/why-there-should-be-a-bitcoin-central-bank/

It is no secret that today, almost all modern banks operate on the basis of fractional reserves. To put in simpler terms: banks only has in their vaults a small percentage of the money that their customers gave them; if a large enough number of customers of a specific bank want to get their money back, the bank wouldn’t be able to meet the demand. Before there was modern central bank system, the bank could either have to borrow or file for bankruptcy.

[bitbouillion]

Why would someone prefer an IOU on Bitcoin over Bitcoin itself? In traditional banking IOUs make sense, because it is safer and makes the money easily transferable. But with Bitcoin there is no such advantage. Also, who would borrow Bitcoins at astronomical REAL interest rates? Fractional reserve banking will never work with Bitcoin.

[Swordsoffreedom]

Saw this in Bitcoin discussion as well

A fractional reserve will not work in bitcoin, if a company wants to operate a fractional reserve they can easily due it with the fees they generate and then keep the bitcoins to become their reserve.
A 1% Fee on 1 BTC moved 100 times is a 1 BTC reserve scaled up with enough users and they can easily cover their exchanges position given time.

If a bank screws up, the argument maintains, it should face the consequences alone, rather than letting all economy participants across the system to share the pain in the form of debased per unit currency value.

Correct, we don't need Bailouts.

[gmx95]

If there would be a bitcoin central bank it would not be a bitcoin anymore. :-)
It would be just another currency controlled by a group of people or a government.

[cr1776]

I'm sure we all look forward to seeing this alt FedCoin once it is forked from bitcoin. It will be an interesting experiment and demonstration to show what people prefer when they have a choice.

[LiteCoinGuy]

forbes still dont get it.

[Rampton]

I don't get the article either. They say their should be a central bitcoin bank then their first paragraph goes on to explain how and why banks are bad. We don't need them. Bitcoin is for people who can and like to hold onto their own money.

[IYFTech]

Forbes........

Can't......... Breathe.........

[JetLi]

Rediculous title this thread has, I don't even read article.

[odolvlobo]

Fractional reserve banking with bitcoin is very likely. As Bitcoin becomes mainstream (or perhaps in order for Bitcoin to become mainstream), people will want to borrow bitcoins. Unless you believe that crowdlending (ala Prosper and LendingTree) will replace bank loans, then people will borrow bitcoins from Bitcoin "banks", such as Coinbase. The banks will get the bitcoins from depositors. That's classic fractional reserve banking.

As the article points out, some protection against bank runs will be necessary; however, I think it is more likely that Bitcoin banks will form groups that agree to back each other, and a central bank like the Federal Reserve will be unnecessary. On the other hand, governments could change that by requiring Bitcoins banks to be regulated by their central banks.

[aigeezer]

The article is fairly interesting, despite the dull thump of a title.

The author demonizes libertarians a bit to set the stage, then cites Gox as a justification for future centralized "protection" (be afraid, be very afraid).

Many people will be tempted by that argument, I imagine, especially in this era's "no risk, regardless of cost" political climate.

It's good practice to see whether you can come up with counterarguments. Mine are:

1. It's foolish to keep funds in exchanges. Exchanges are not banks. Gox was a very predictable calamity - the only doubt was when and how it would have a serious setback. It may or may not be foolish to keep money in banks, but that is a separate issue.

2. It is widely felt that in the present system the bank "watchers" are corrupt and/or in collusion with the watched banks, leading to moral hazard issues such as "who watches the watchers?". The author proposes new and different watchers for his central bank, but the issues remain the same. If central, then corruptible (or corrupt from the outset).

3. As others have suggested, any version of BTC that has a centralized choke-point is not BTC. If such a thing emerges it will have its own life cycle, separate from that of BTC.

Forbes of course has a stake in the existing systems - it is still good practice to refute the arguments though. More subtle "trust us" proposals are bound to be in the pipeline as BTC evolves - I hope we never fall for them.

[notthematrix]

Fractional reserve banking with bitcoin is very likely. As Bitcoin becomes mainstream (or perhaps in order for Bitcoin to become mainstream), people will want to borrow bitcoins. Unless you believe that crowdlending (ala Prosper and LendingTree) will replace bank loans, then people will borrow bitcoins from Bitcoin "banks", such as Coinbase. The banks will get the bitcoins from depositors. That's classic fractional reserve banking.

As the article points out, some protection against bank runs will be necessary; however, I think it is more likely that Bitcoin banks will form groups that agree to back each other, and a central bank like the Federal Reserve will be unnecessary. On the other hand, governments could change that by requiring Bitcoins banks to be regulated by their central banks.

Fractionakl reserve is not needed in bitcoin , you only need prove of reserve , thats it.
You only need to prove you have the money , if you borrow the lender needs to prove it has the reserves to the seller and buys it for the borrower.
It is not creating money out of notting like fiat , but thats a good thing to stop annyway , we waste way to match resources because of this.

Banning bitcoin is like banning tor or piratebay , simply not passible.

[botany]

This reminds me of another hilarious article
http://cointelegraph.com/news/111686/citi_wants_to_tie_bitcoin_blockchain_to_fiat

[btcm4n14c]

there shouldnt be any BTC banks, its against BTC own ideals

[odolvlobo]

Fractionakl reserve is not needed in bitcoin , you only need prove of reserve , thats it.

I don't know what you mean by "prove of reserve", but a bank can't loan bitcoins it doesn't have, so it borrows bitcoins from its depositors and loans them out. That's fractional reserve banking.

there shouldnt be any BTC banks, its against BTC own ideals

If you want a mortgage and there are no banks, where will you get it?

[notthematrix]

Fractionakl reserve is not needed in bitcoin , you only need prove of reserve , thats it.

I don't know what you mean by "prove of reserve", but a bank can't loan bitcoins it doesn't have, so it borrows bitcoins from its depositors and loans them out. That's fractional reserve banking.

there shouldnt be any BTC banks, its against BTC own ideals

If you want a mortgage and there are no banks, where will you get it?

proof of reserve proofs that you have the reserve to lend.
https://iwilcox.me.uk/2014/proving-bitcoin-reserves no fractional reserve needed , mortgage  implies that prices are NOT marked compatible , if prices are that high you need one , it means that there is a bubble and that is non sustainible it creates inflation , in a defaltaionarry currency it is also not needed , since vaulue will increase over time
 

[bitbouillion]

Fractional reserve banking with bitcoin is very likely. As Bitcoin becomes mainstream (or perhaps in order for Bitcoin to become mainstream), people will want to borrow bitcoins.

Bitcoin is simply lacking the economics enabling fractional reserve banking, which is a good thing.

[odolvlobo]

proof of reserve proofs that you have the reserve to lend.
https://iwilcox.me.uk/2014/proving-bitcoin-reserves no fractional reserve needed , mortgage  implies that prices are NOT marked compatible , if prices are that high you need one , it means that there is a bubble and that is non sustainible it creates inflation , in a defaltaionarry currency it is also not needed , since vaulue will increase over time

I seems like you believe that borrowing is never good. Suppose you need a mortgage to buy a farm. You can't afford to buy it with the bitcoins in your wallet so you get a mortgage and the income from the farm is used to feed your family and pay off the debt.

Bitcoin is simply lacking the economics enabling fractional reserve banking, which is a good thing.

What do you mean by "lacking the economics"? I would like to point out to all the skeptics that fractional reserve banking existed while the dollar was on the gold standard. There is no reason why it couldn't also be applied to Bitcoin in the same way.

[bitbouillion]

What do you mean by "lacking the economics"?

Nominal positive interest rates on Bitcoin loans are not economically sustainable when inflation measured in Bitcoin is negative.  Credit would be too expensive. Negative interest rates could solve this, but who would deposit Bitcoins at negative interest rates? Central banks can print their way out of a deflation or ban cash (forced deposits which allow negative rates), but I doubt that the crowd will ever allow that to happen to Bitcoin.

I would like to point out to all the skeptics that fractional reserve banking existed while the dollar was on the gold standard.

You can't go backwards in the evolution of money. There are many reasons why IOUs replaced gold.

There is no reason why it couldn't also be applied to Bitcoin in the same way.

Simply the technical concept doesn't change the underlaying economics.

[notthematrix]

What do you mean by "lacking the economics"?

Nominal positive interest rates on Bitcoin loans are not economically sustainable when inflation measured in Bitcoin is negative.  Credit would be too expensive. Negative interest rates could solve this, but who would deposit Bitcoins at negative interest rates? Central banks can print their way out of a deflation or ban cash (forced deposits which allow negative rates), but I doubt that the crowd will ever allow that to happen to Bitcoin.

I would like to point out to all the skeptics that fractional reserve banking existed while the dollar was on the gold standard.

You can't go backwards in the evolution of money. There are many reasons why IOUs replaced gold.

There is no reason why it couldn't also be applied to Bitcoin in the same way.

Simply the technical concept doesn't change the underlaying economics.

Yes it does it is the first time in history that you can see the availble number of "gold" availble in the system!
at this time https://blockchain.info/charts
is never done before , so this DOES change underlying economics.