BitCoin Bank

[Rage]

So I've been thinking a lot about banking lately, specifically how it could be done within an anonymous, secure, community where fraud is so freaking easy. All-in-all, I don't think it would be that difficult to set up a BitCoin bank. The problem I see is incentive to continue running it.

Traditional banks make money mostly in three ways:

- Loans paid back with interest
- Fees associated with accounts
- Other associated 'services' like a safe deposit box, financial consultations, etc

By far, I'd say the primary driver for a banks revenue stream is probably loans. Loans are done through a series of complex financial manipulations where banks are allowed to lend out roughly 9-10 times what they have in the vault at any one time (called 'fractional reserve banking' http://en.wikipedia.org/wiki/Fractional-reserve_banking) and I see that as a major problem with our current banking industry. I don't think it's a good idea for a BitCoin ban so that leaves only two major ways for a bank to earn money.

Obviously, offering things like safe deposit boxes is complex in an anonymous system (though not impossible) as are financial consultations (they can compromise a customers anonymity and the consultant would need to compromise their anonymity to prove they're not a huckster). So, really, that leaves only fees associated with accounts (holding and withdrawing) as a reliable way for a BitCoin bank to make money.  This is certainly doable but definitely (probably?) won't make a banker wealthy (which might not really be the goal).

What challenges do you think need to be overcome before we can see First Bank of BitCoin open its doors?

Rage

[1714033346]

1714033346

[Anonymous]

I think a bitcoin bank could only loan the coins it has on deposit ie 100% reserve. lending in a deflationary currency is dangerous imo.

http://www.freelakotabank.com/ bills itself as the worlds only non fractional bank. If anyone would know how to run a bitcoin bank it would be them. They only do silver rounds though at the moment.

More than likely they would store bitcoins offline using truecrypt and other tools and would have to hire security experts and submit to third party audits.

[davout]

definitely won't make a banker wealthy

This is one of the reasons I like bitcoin

[davout]

I think the main benefit of using a bitcoin bank in the future will be :
 - Cutting on transaction confirmation time when transfers happen inside the bank
 - Cutting on transaction fees, still when transfers happen inside the bank

[ben-abuya]

Also, there's no reason transaction times and costs would be cut only for transactions within the bank. Established banks will trust each other and do transactions with each other without having to trust the individual depositors (possibly even on a ripple network). Other huge advantages to banks like these are securing the bitcoins themselves, offering insurance in case of lost bitcoins due to a flaw in the backup regime, or a virus, and implementing access control to different wallets, which would be useful in a large company.

The beautiful thing is that none of these are particularly expensive. If backup and security is done right, the insurance costs should be very low. Everything else is pretty simple, with low barrier to entry. It's just not the kind of stuff each individual bitcoin owner should have to do.

[tomcollins]

Loans can be made on time deposits.  The bank offers me a 1 year CD.  Then they can give someone a 1 year loan.  I cannot use my deposit for that time period, and the person being loaned the money cannot as well.  The bank tries to make a profit by charging a higher interest rate on the loans than deposits.  Sometimes they screw up and lose money on individual deals.  But mostly they set it up to be safe enough not to.

The biggest challenge in giving a loan with BTC is the difficulty in establishing you aren't going to scam the bank and having a way for the bank to come after you if you screw them.  Reputation could be used to try to make sure you have a good track record.  However, to account for all the losses from people not paying you back, the interest rate would likely be fairly high.  This means only the most profitable investments can be made with loans (this is a good thing).  You likely won't see loans made for consumer goods.  Loans with collateral could work, but you need a way to enforce that.

[chaunceyG]

anyone willing to work on a bitcoin bank please reply.  basically we'd be setting up a virtual proxy for community credit.  the way banking works right now is the Fed creates reserves via a double bookkeeping entry where by it simultaneously buys a US Treasury bond and from a primary dealer (think JPM, BofA, Citi, Wells, etc) and then they deposit the money on reserve at the Fed.  This reserve did not exist before the this transaction, it is created out of thin air by the Fed.  Primary dealers can then make loans to you and I off of this reserve base depending on the "reserve ratio".  If for example the required reserve ratio is 10% then $100 in reserves would support $1000 in new credit money ($100/.10).  In this way, banks can create money out of nothing there by controlling the supply of credit.  The only limiting factor is the willingness or ability of the the rest of us to take on new debt.  After the housing bubble this tapped US consumer out which is why the only thing currently keeping the economy afloat is the Federal Government filling in the gap with $5 trillion expansion in its debt.  With the debt limit debate fast approaching, our politicians are hell bent on fiscal austerity that will pull this public support out from under the economy...It is my belief that this will create an even greater shortage of credit and liquidity than already exists cutting off the life blood from small business USA.  there will have to be radical new solutions to dealing with this problem when the next shoe drops unless you are happy with Goldman Sachs or Citigroup as your community banker.  this is where ideas like a bitcoin bank could come in.  it would be 100% reserve banking (honest banking) where pools of global bitcoin savings would be lent out to projects approved by the owners of that particular bitcoin pool.  any profits accruing to these pools would flow to all members of the bitbank in the form of bitdividends.  there would have to be some mechanism to ensure that all interest is recirculated back into the bitcoin community to prevent hording. because there is 100% reserve the value of the bitcoin would not be undermined by adding bitcoin credit into the bitcoin economy.  what the bitbank would not be is a legalized form of usury like debt dollar system we have globally today.  its a massive undertaking and one that would face an enormous amount of push-back but given the gross miss-allocation of stored capital that exists today, it's worth a shot.

[Pixie]

I'm considering it (I have a registered business already in the process of accepting bitcoins), however for me any bitcoin bank should honour a charter/code thats in line with the bitcoin ethos. Apart from writing the software, this imho is the first thing that needs defining before going into the bitcoin business.

Currently my proposed banking charter would be

• 100% loan backing : Every loan of 1BTC is backed by a reserve of 1 BTC
• Transparency : Real time view of the banks reserves, so as to prove viability
• Saving separate from Loan/investment : Any savings/investment are in a separate reserve which is protected and paid back in case of collapse (no risk to savers)
• Minimum digital protection guarantee : Numbers of copies stored, encryption levels, access rights, etc.
  

However these conditions will make it much less profitable to be a bank than traditional bank, whilst many may see that as an issue it also means its less a 'gold mine' opportunity so likely to develop fast.

Profits on loans are simple and easy, either traditional interest or another scheme fitting those who cannot pay interest (certain religions)
Savers will expect interest BUT a 100% no touch policy would mean no way to generate interest. I'd suggest an agreed use percentage and a interest level based on that. i.e. a saver agrees to allow 20% to be used by the bank and in return gets a 1% interest return on the entire savings... (number plucked out of the air for example only).
For those who just want to use banking current account facilities, perhaps a small monthly fee to covers running costs?
Bank would also be an ideal place to run community investment and loan systems : Peer to peer with the bank offering certain guarantees and escrow services...

Just my ideas so far, would like to hear what others think and what they would want of a bitcoin bank...

[Alex Beckenham]

• Saving separate from Loan/investment : Any savings/investment are in a separate reserve which is protected and paid back in case of collapse (no risk to savers)

What would be the point of paying interest on people's savings, if you can't use their deposits to earn interest yourself (via lending)?

[Pixie]

• Saving separate from Loan/investment : Any savings/investment are in a separate reserve which is protected and paid back in case of collapse (no risk to savers)

What would be the point of paying interest on people's savings, if you can't use their deposits to earn interest yourself (via lending)?

Indeed which is why I suggested underneath an agreed fixed amount of saving for investment perhaps as a system to allow interest. Or prehaps not paying interest, instead taking a small fee monthly for the service of keeping it safe, quick access etc.

Finding a banking method that works both for the consumer and the bank is tricky which is why I'm asking what others think.

[davout]

Finding a banking method that works both for the consumer and the bank is tricky which is why I'm asking what others think.

IMO lending for interest can work in a sustainable way with a deflationary currency.

[HolyMoly]

The banking part of bitcoins sounds interesting but I am new to this so I can only speculate, sorry if any of this sounds really dumb but I am learning about this and its going to help to think this through...

It looks like there is no rule of law so perhaps its going to be very difficult to do something like loans. The bank right now shouldn't be much more than accepting deposits and charging a security fee to the depositor. People are scared anyway of something happening to their computer, like a virus or whatever, so perhaps there is a way to alleviate that fear. Good old fashioned bitcoin safe deposit box.

[Pixie]

The banking part of bitcoins sounds interesting but I am new to this so I can only speculate, sorry if any of this sounds really dumb but I am learning about this and its going to help to think this through...

It looks like there is no rule of law so perhaps its going to be very difficult to do something like loans. The bank right now shouldn't be much more than accepting deposits and charging a security fee to the depositor. People are scared anyway of something happening to their computer, like a virus or whatever, so perhaps there is a way to alleviate that fear. Good old fashioned bitcoin safe deposit box.

Deposit security box is the first thing a bank would do imho, partly to establish trust and confidence in the bank (obviously being a registered business is required but until we have outside auditors of the banks, they have to earn their trust with potential customers.

I do think loans are viable just different from conventional banks. Much closer to the old traditional loan system,

I as the banker have N deposits of bitcoins (my load reserve)
U wants of loan of M bitcoins (M <= N)
U have to provide I with reason to I to loan you the cash, currently that would likely by the existing otp trust system.
If I think your trust worthy I calculate a interest rate on that risk, I loan you that money and you pay a portion of the loan + interest each month.
U default, I did my risk calculation wrong and take the lose.
U are a good customer, U get the loan, I earn interest and your risk ratio (and therefore interest) get better.

[caston]

You could possibly use a bitcoin deposit for a fiat money loan. If the bank needs to make a margin call or you late with a payment they have the option of dipping into your deposit. Once the loan is paid off you get your bitcoins back or you can take out another loan.

[Pixie]

You could possibly use a bitcoin deposit for a fiat money loan. If the bank needs to make a margin call or you late with a payment they have the option of dipping into your deposit. Once the loan is paid off you get your bitcoins back or you can take out another loan.

I see this as part of the risk assessment, this is the closest we can probably get at the moment to a security. If U are willing to put some of you money upfront as a security its clearly reduces the risk, its possible to think of other securities but the lack of physical accountability obvious cuts any many of the more traditional ones.

Another way to lower risk would be to have a current account which demonstrates a good constant flow of bitcoins.

[caston]

A portion of the fiat loan could also be used to buy more bitcoins and as those coins increase in value they then can be used to pay back the loan. E.g. you may borrow 100k and you use 80k to buy a house
and 20k to buy bitcoins. You reduce each monthly payment but are then liable for a balloon. When your balloon is due you sell your bitcoins to pay off the balloon and and use the remainder for anything you like. e.g. go on holiday, take a sabbatical, start a new company, get married and start a family or so on.

[Nesetalis]

has anyone asked the question yet... how do you enforce a loan?
say i put in bogus information.. i'm anonymous.. i take out a 10btc loan... then I go and decided to forget that account, email, whatever... suddenly you have no way to force me to pay back 10BTC.... even if you had my information, going to court for it would be really really tough.

[vuce]

has anyone asked the question yet... how do you enforce a loan?
say i put in bogus information.. i'm anonymous.. i take out a 10btc loan... then I go and decided to forget that account, email, whatever... suddenly you have no way to force me to pay back 10BTC.... even if you had my information, going to court for it would be really really tough.

That's why i think bitcoin bank will never work...

[speeder]

has anyone asked the question yet... how do you enforce a loan?
say i put in bogus information.. i'm anonymous.. i take out a 10btc loan... then I go and decided to forget that account, email, whatever... suddenly you have no way to force me to pay back 10BTC.... even if you had my information, going to court for it would be really really tough.

This is why ancient banks based on gold asked for guarantees (ie: stuff you do not need right now, but that are valuable, like cars, jewels, etc...)

[Nesetalis]

exactly, and what is a bitcoin bank going to use as collateral?