BitCoin Bank

[tomcollins]

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

There's no reason to think this couldn't be done with the existing legal system.  Reputation is also collateral in some respect (or could be).  If you don't pay your debt, your reputation is smeared and no one will do business with you.

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[Nesetalis]

seeing that bitcoin is international... using an existing legal system is going to be a severe pain in the ass...
and reputation is hardly a danger for many people, new name, new face... the internet is anonymous.. and bitcoin is semi-anonymous.

[Alex Beckenham]

seeing that bitcoin is international... using an existing legal system is going to be a severe pain in the ass...
and reputation is hardly a danger for many people, new name, new face... the internet is anonymous.. and bitcoin is semi-anonymous.

Just because bitcoin is 'anonymous' doesn't mean the institutions that utilise it need to be.

You could set up a bank exactly like any other cash bank is set up now... domestically.

Why does a bitcoin bank have to automatically be international?

For security you could put up title to your house or land, just like when people take out loans for fiat.

[Nesetalis]

if its not an international bank, then its of less importance..
if it is an international bank... then they are going to have alot of hurdles to overcome.

[Alex Beckenham]

if its not an international bank, then its of less importance..

Perhaps, but an Australian bitcoin bank could still be mighty handy for Australians, regardless of whether or not other countries have them too.

[tomcollins]

if its not an international bank, then its of less importance..

Perhaps, but an Australian bitcoin bank could still be mighty handy for Australians, regardless of whether or not other countries have them too.

And the banks could do business with each other based on reputation.

[Nesetalis]

i meant its less important due to the the distribution of bitcoin users.. only a certain few could use that bank regularly...
Its hard to say if a bank would want to do buisness with an individual in another country.. the inter-country laws are sticky. but for the moment lets assume that each country gets its own bitcoin bank (or 30)... which i think would be the most awesome thing ever mind you
this would probably be a good model..
however, i was under the impression people were starting banks as external entities as bitcoins are.

[Pixie]

Each bank will have its own risk assessment... reputation, a current account and other details are likely to be the minimum for a loan.

Its no different from the current banking/loan system, Can you prove you are working? Do you have a bad credit history? Have you lived at your current location for several years? Can you show ID?

No loan is going to be given anonymously, as a standard business I can profile a customer quite well based on digital information. As banks grow this profile will likely get better as well.

I'd also expect credit rating agency to appear to track bad credit just as they do now.

Some loans will go bad of course, but that risk factor goes into everybody loans interests rates.

[tomcollins]

Each bank will have its own risk assessment... reputation, a current account and other details are likely to be the minimum for a loan.

Its no different from the current banking/loan system, Can you prove you are working? Do you have a bad credit history? Have you lived at your current location for several years? Can you show ID?

No loan is going to be given anonymously, as a standard business I can profile a customer quite well based on digital information. As banks grow this profile will likely get better as well.

I'd also expect credit rating agency to appear to track bad credit just as they do now.

Some loans will go bad of course, but that risk factor goes into everybody loans interests rates.

It's much different than the current system.  If I default on my car loan, they take my car.  If I default on my mortgage, they take my house.  If I default on my credit card, they come after me for it and can win a judgment against me.

[Alex Beckenham]

If I default on my mortgage, they take my house.

This is because (in Australia at least) they hold the title to it.

So what's different?

If you default on your bitcoin mortgage from a bitcoin bank where you've used your house as security, they take your house.

[Pixie]

It's much different than the current system.  If I default on my car loan, they take my car.  If I default on my mortgage, they take my house.  If I default on my credit card, they come after me for it and can win a judgment against me.

The first two are secured loans, and require some way of securing which usually is by default local. I can't in country A secure credit in country B using my house/car etc. because they can't get it, if I default (easily).

Secured loans just affect the risk ratio, an easy "takeble" item so lowering the rate you pay interest as collateral.

But take most unsecure loans or a credit card, in those cases essentially they have 3 outcomes
1) You pay
2) You default and they call ballifs to take goods upto the value
3) They wipe it out as bad debt, and make sure you can never get credit again.

3 is for many people what happens, the real reason you want to keep paying your credit bills is so you CAN get credit in future.

As soon as the first bitcoin bank is setup I fully expect a bad debt protocol will come with it, perhaps even a name and shame system (public bad debt record as used in England in the last few centuries).

My thoughts in being a banker, is that I'd accept bad debt will happen sometimes, its part of the business and that risk will be calculated in the interest rates people would pay. Want cheaper interests rates, prove to me your less of a risk (complete loans etc.)

[tomcollins]

It's much different than the current system.  If I default on my car loan, they take my car.  If I default on my mortgage, they take my house.  If I default on my credit card, they come after me for it and can win a judgment against me.

The first two are secured loans, and require some way of securing which usually is by default local. I can't in country A secure credit in country B using my house/car etc. because they can't get it, if I default (easily).

Secured loans just affect the risk ratio, an easy "takeble" item so lowering the rate you pay interest as collateral.

But take most unsecure loans or a credit card, in those cases essentially they have 3 outcomes
1) You pay
2) You default and they call ballifs to take goods upto the value
3) They wipe it out as bad debt, and make sure you can never get credit again.

3 is for many people what happens, the real reason you want to keep paying your credit bills is so you CAN get credit in future.

As soon as the first bitcoin bank is setup I fully expect a bad debt protocol will come with it, perhaps even a name and shame system (public bad debt record as used in England in the last few centuries).

My thoughts in being a banker, is that I'd accept bad debt will happen sometimes, its part of the business and that risk will be calculated in the interest rates people would pay. Want cheaper interests rates, prove to me your less of a risk (complete loans etc.)

#3 happens, but people often need to file for bankruptcy, and their assets get cleaned out for it.  It's not a trivial process.  There is the arm of the government legal system that they have that they can use as well.

I think the shame/good name system could work, although proving yourself initially is going to be quite costly.  No one will loan to you without really high interest rates (credit cards have quite high interest rates).  But you won't want a high interest loan unless you are very profitable, trying to prove yourself and will pay the cost, or are a scammer.  It's also easy to create a new identity from scratch, so you could just go through that process a lot.  Someone will be creative and find a way to make this work if it's a good idea, though.

[idev]

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...

I think it could work with the correct KYC polices in place,
but of course this is at cost of anonymity.

[evoorhees]

Bitcoin transactions are anonymous, but that doesn't mean banking systems using bitcoins need to be. I can imagine a bitcoin bank would not lend anonymously for obvious reasons. The solution is simply that the bank needs to know who/where the person is, and have a reasonable expectation that the loan will be repaid. Some banks will have higher thresholds for "reasonable expectation" than others, and you'll see this risk reflected in the interest rates they offer. A bank which required proof of identity and/or collateral will be able to offer a lower interest rate and the market will decide what model works best, or perhaps multiple types of banks would exist concurrently.

Also, regarding fractional reserves... there is nothing wrong with them SO LONG AS bank losses are not insured by a government agency AND so long as the bank makes this fractional policy known to its depositors. A fractional bank can offer higher interest rates than a 100%-deposit bank, and individuals can choose their risk/reward accordingly.

[Alex Beckenham]

Also, regarding fractional reserves... there is nothing wrong with them SO LONG AS bank losses are not insured by a government agency AND so long as the bank makes this fractional policy known to its depositors. A fractional bank can offer higher interest rates than a 100%-deposit bank, and individuals can choose their risk/reward accordingly.

I get how it's possible to create a fractional fiat bank, because you can just make $ out of thin air to lend out, but how do you create a fractional reserve bitcoin bank?

[Pixie]

Okay Bank lending is one aspect of a Bank, which seems doable with some caveats about size of loan and trust but not the only one. The other two personal banking areas are saving and current accounts.

So what does that mean in a Bitcoin bank?

A saving account traditional holds your money in trust returning you an interest rate bonus for doing so. The interest is generated via the bank being able to use your held money for loans, investments etc. The problems are saving guarantees, currently most countries guarantee consumer savings up to some value even if the bank fails, that of course can't happen for bitcoins, so do would we need a guarantee? and if so how would it be achieved?

My approach would be that saver specifies how much of their savings can be used for interest, from this the amount of interest s generated but also is potential lose if Bank closes.
So I save 10BTC and decide to allow 5BTC to be used for a guaranteed interest rate return of 1% per month. So assuming no component interest (could be the savers choice, which pool interest goes into), I earn 0.5BTC interest per month.
A Bank may set a minimum amount to disallow free savers (0 used for interest), on the other hand it might just let it happen (free saving account) as a goodwill / PR thing. I'd also suggest that a 0% interest saver account is really a wallet backup account and may be clearly to call it a backup account rather than savers to show it earns nothing.

A current account, the most used part of a current account is paying bills.

For a BTC current account i'd suggest

Instant transfer internal to the bank and to other banks with a data transfer agreement (A Bank could fast track bitcoin transaction time because it knows both ends, if they are both customers)

Traditional bank to bitcoin bank transfers - probably local country only but transferring money from Cash Bank to and from bitcoin
bank would be safe and cheap for the Banker.

Statements and tracking - allowing you safely see what you have, where you spent it

Secure - you wallet and bitcoins safely stored and protected from local effects

Overdraft - A bank may choose to allow a customer so head room, a predefined loan space...

Fee - A fixed monthly charge would seem to be the simplest and fairest system. The customer pays a small fee per month for the current account to be maintained.

Would anybody find such a thing actually useful?

[fergalish]

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.

I think I've never understood this fractional reserve banking 'cos I've seen obviously informed people make statements like this.  My understanding is that our current banking system is about 5% reserve - a bank can load out $100*0.95=$95 of every $100 it receives.  When the $95 is redeposited, then another $95*0.95=$90.25 can be loaned, then $90.25*0.95=$85.73 and so on.  Creating vast amounts of "non-existent" credit based money, from a minimal initial investment.

What noagendamarket is describing here, that is, a bank that loans the coins it has on deposit (I implicitly understood "can loan *all* the coins it has on deposit"), is NOT a 100% reserve bank, it is a 0% reserve bank - it is *way* worse than a 5% fractional reserve because an initial $100 deposit can turn into an infinite amount of credit.

An actual fully reserved bank, i.e. a 100% reserve bank, could not make any loans at all.  That's the only way to ensure that all deposits are backed 100% by reserves.

Shoot me down.

[tomcollins]

Also, regarding fractional reserves... there is nothing wrong with them SO LONG AS bank losses are not insured by a government agency AND so long as the bank makes this fractional policy known to its depositors. A fractional bank can offer higher interest rates than a 100%-deposit bank, and individuals can choose their risk/reward accordingly.

I get how it's possible to create a fractional fiat bank, because you can just make $ out of thin air to lend out, but how do you create a fractional reserve bitcoin bank?

You tell someone they have 100BTC in their account, and give a loan out for 90BTC, keepign 10 BTC in reserve.  Repeat this times a lot of customers, say you have 100,000 BTC in account credits, loan out 90,000 BTC, and keep 10,000 BTC.

If someone who deposited wants their money, you take out of the 10,000 BTC.  If enough customers try to take out the money, they are SOL.

[chaunceyG]

Pixie, tomcollins et al, thanks for your input.  I think THE most important role bitcoin could play is as a mechanism for social credit.  I think its important to not get lost in the model of traditional banking.  let's not even call it a bank for a moment.  lets assume these are social lending pools. tom you are right on the money in that there doesn't need to be an enforcement mechanism greater than Ebay's reputation watch.  since the lenders (bitcoin savers) create the pool, they can set the terms, and rules for enforcement.  Because they are taking that risk they get a portion of the future bitcoin stream that results from the project (interest).  If the borrower fails to repay the loan that is a bad outcome for the lenders but not bad for the economy because those bitcoin will be spent and redistributed throughout the bitcoin economy. BECAUSE THERE IS NO FRACTIONAL RESERVE LENDING (ie lending out bitcoin notes that promise to deliver real bitcoins), NOTHING IS CREATED OR DESTROYED.  The lenders loss, is the producers gain.  The borrower reputation goes down but even he can get back in the game eventually.  The lenders learn their lesson and in the process become better underwriters.  This cuts out the idea of a bank entirely. Because we can safely store our own bitcoins, we don't need the middleman who was only ever really offering the secure storage of money anyway.  My idea is merely to link borrowers (entrepreneurs) with willing savers (investors).  In fact every transaction (bitcoin loan) can have its own custom terms depending on the parties involved.  THIS IS WHAT FREE MARKET CAPITALISM REALLY IS.  Not the banking cartel monopolized system of usury that we currently live under that the monopolists would have you believe is free market capitalism.  to me the road block to this will always be the establishment, and they will use taxation to try to control any free credit system that emerges from this clear monetary revolution that is bitcoin.

Again I am really interested in working on this project real time.  Feel free to contact me via email if you know of people already working on such a product.

[Basiley]

some entities may be interested in it.
already distributed enough on Globe and have both financial and political interests.
both legal and not/acused in illegal.
for example - number of charity orgs in 1st case and wilileaks/other freedom-f-orgs.