BitCoin Bank

[fergalish]

BECAUSE THERE IS NO FRACTIONAL RESERVE LENDING (ie lending out bitcoin notes that promise to deliver real bitcoins), NOTHING IS CREATED OR DESTROYED.

Tell me about investors who invest in this social lending pool.  Suppose I deposit BTC100 in your lending pool. Do you then issue me with a credit note (i.e. bitcoin notes, "promises-to-pay") saying I have the right to recover BTC 100 from the pool?  Do you then lend my BTC100 to someone else?  Well, now I have 100 "virtual" bitcoins, and someone else, the borrower, has 100 "real" bitcoins.  That's 200 bitcoins.  Where before there were only 100.

If you want this to work, without your investors being really pissed off, then their deposits can be recovered only on condition the loans get repaid.  That way there's never extra bitcoins "created".  Good luck finding investors under those conditions.

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[elewton]

If an investor has a track record of investigating his investments and deriving Bitcoin profits from them, I might be interested in lending him Bitcoins in return for more Bitcoins after a specific date.  Naturally, the Bitcoins would be inaccessible to me while they are being used.

If I wish for someone to expend effort storing my Bitcoins securely, and make them available to me via a trusted ID system, it's reasonable that I pay for this.  One way I can pay for this is to allow some of my Bitcoins (any arbitrary percentage) to be used in investment by said entity, along with the explicit statement of repayments, inaccessibility time, risk and guarantees.  Alternatively, I can simply pay a small percentage of the Bitcoins stored in fees.

As long as the system has reputation to be lost, shouldn't the market choose between different risk profiles?

[markm]

It might make sense for companies producing something to be the first lenders.

Like an automobile manufacturer, for example. "I will loan you bitcoins to buy my automobile" kind of thing.

Basically, any case where really it is not in effect actual bitcoins that are being loaned, really what is being loaned is "whatever it is that the borrower had been thinking of borrowing bitcoins to buy".

In other words loans *denominated* in bitcoins but not involving actually putting any actual bitcoins into the borrower's possession.

Two of the blockchain-based currencies my IRC bots support are already doing this; it has also the advantage of causing the loans to be at least to some extent "secured" (the extent being a combination of the effectiveness of the repossession facilities in use and the re-use value of the used merchandise, and this can be priced into the cost of the loan aka the price of the merchandise when purchased "on credit" in this way).

-MarkM-

[Anders]

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.

Yes, it's called fractional reserve banking. Here is a documentary called Money as Debt about fractional reserve banking: http://www.youtube.com/watch?v=Dc3sKwwAaCU

Fractional reserve banking would not be possible with Bitcoin as I see it, unless the bank would start to give out credits and demand interest for those credits, but that's not possible with Bitcoin as I understand it.

[speeder]

It is quite possible, but also ridicously risky and might lead to massive bankrupcies and defaults.

[Anders]

It is quite possible, but also ridicously risky and might lead to massive bankrupcies and defaults.

You mean making Bitcoin credits is possible? Yes, if a Bitcoin bank knows that only a small percentage of its customers' bitcoins stored at the bank will ever be demanded by the customers, then they can lend out the other part and demand interest for that. lol. That will create a similar situation as today with the risk of runs on banks which means that the banks have lent out more money than they actually have in deposit.

[charlie]

definitely won't make a banker wealthy

This is one of the reasons I like bitcoin

exactly i hate the fatcats too

[elewton]

It's reasonably possible to orchestrate a bank run day with Bitcoin banks.  It could happen every February third.
Banks could protect themselves in their contracts by charging for high liquidity.  If you wish to withdraw more than 50% of your savings, you must give 30 days warning or pay a penalty, for example.

A bank can provide valuable services in return for the fees or hassles.  I might bank with a Bitcoin banker who; launders my Bitcoins, provides Biometric security access (blood, hashed SNPs?), and has branches or deals with other Bankers around the world.

[chaunceyG]

Tell me about investors who invest in this social lending pool.  Suppose I deposit BTC100 in your lending pool. Do you then issue me with a credit note (i.e. bitcoin notes, "promises-to-pay") saying I have the right to recover BTC 100 from the pool?  Do you then lend my BTC100 to someone else?  Well, now I have 100 "virtual" bitcoins, and someone else, the borrower, has 100 "real" bitcoins.  That's 200 bitcoins.  Where before there were only 100.

If you want this to work, without your investors being really pissed off, then their deposits can be recovered only on condition the loans get repaid.  That way there's never extra bitcoins "created".  Good luck finding investors under those conditions.

Yes this transaction would create a new asset that is a claim on "BTC100 + interest" contract owned by the pool.  But that is not the same thing as 100 bitcoins, its just a contract.  Again the lenders/investors are receiving a BTC100 + x in the future.  Whatever this x is compensates for the risk of parting with the BTC100 today and possibly permanently.   In deciding what x is depends on what the lenders demand for return on their bitcoin savings is and what the borrowers demand is for bitcoin financing and ultimately, the potential (perceived potential) of the venture to produce a rate of bitcoin profit that is greater than x. 

This is much different than how lending works today.  A metaphor is that the bank would make you a BTC100 loan which you then use to purchase the collateral securing the loan. The seller of the collateral deposits the BTC100 coins back in the bank. You now have the real asset and a liability to the bank to repay BTC100 + interest.  The back has a claim on BTC100 + interest x secured by the real asset, and a liability to the seller of the asset of BTC 100 + y.  The BTC100 didn't exist before this transaction and neither did the interest x.  The bank pockets the difference x-y and now holds a claim on the real asset involved.  If you default and the BTC value of that asset falls below the BTC 100 deposit liability, the bank owes the depositor BTC100 - real asset value.  With the financial crisis today, this shortfall is being picked up by the taxpayer through an artificially wide difference between x-y (US 10Y 3.2% - fed funds 0-.25) and the ability of the banks not to have to account for this loss all at once.  Therefore, all that the Financial Crisis did was make explicit what was the implicit tax payer backing of the banks' ability to create BTC100 when they did not exist before.  This is credit money inflation and since 1980 has run at about 9.8% annually in the US.  Thanks to this system, the owners of the finance industry gets to keep the x-y profits it made along the way paid out in dividends.  So ultimately lending today is just a scheme by the lenders to gradually siphon off a bigger an bigger share of the overall pie of wealth.  Now that the scheme has reached its mathematical limit (ie the borrowers cant take on more debt), these holders of the newly concentrated wealth can wield it to restructure the World in whatever way they see fit. 

OF COURSE THIS IS A HUGE OVERSIMPLIFICATION, but the point is that we wouldn't even be talking about something like Bitcoins if people weren't waking up to the fact that something serious has changed with our debt based money system.  That is why Bitcoin is such a brilliant way to start a new community based system of trade.
In the community based economy, the lending pools or investment trusts would be an integral way to keep the currency circulating and put the benefits of lending where it belongs, with the savers not the bankers themselves.

For those interested, money as debt 2 is a great video for exploring this topic:

http://www.youtube.com/watch?v=rCu3fpg83TY

[charlie]

It could be a nice idea offer something like 3.9% APR current accounts and offer loans and such quite like a normal bank but you'd have to have contracts so that people HAD to pay for it and they should upload photo ID like a passport so you can prove it in court etc

[tymothy]

Essentially you are entering into a contract with a loan and with a thorough screening process you could have enough information to go after the person in court fairly easily (assuming they were in your country). The fact that the contract is in bitcoins doesn't matter, as a court would rule on any sort of contract, whether someone promised to pay in Euros or gold or chicken, so long as you could prove that the value of the dispute is greater than $20 (in the US, at least 7th Amendment).

I think the concept of a bank is a fairly reasonable one. Individuals deposit their BTC in a "wallet" account setup through the bank site. Loans come from individuals looking to purchase mining hardware and present a proposal of what they need, the cost, the estimated Mhashes, current mining group and number of hours per day the rig would run along with identification information, passport, driver's license, ss card, proof of income, record of any collateral, btc and otherwise. Based on this, the current and future estimated difficulty and exchange rate, an interest rate and repayment plan would be devised that allows for a generous margin for both profit and potential risk. Depositors have basically invested their money in future mining expeditions and the bank profits by assuming the risk and collecting extra overhead as a service fee.

From a risk perspective, it would be best to initially limit investors deposits to only pay interest if they were invested in a CD-type format, for a period of 3-months, 6-months, 1 year etc with those withdrawing early receiving a substantial reduction in paid interest. Once the bank has a substantial amount of guaranteed capital, faith in the bank would be increased and it could eventually offer interest on regular "checking" accounts based on average daily balance. A limit to account size could be put in place to ensure no single investor could create a bank run. Other restrictions, such as limiting the number of new accounts offered in the event of low loan demand could be established. Interest paid can be adjusted based on exchange rates and difficulty values.

I think it's a fantastic idea. The bank itself would need a fairly substantial capital backing when it first opens, in BTC and probably a "real" currency like USD. I'm very interested in this and if anyone has the programming skills to create such a thing, I'd be happy to pay you, in American greenbacks.

[Pixie]

I think it's a fantastic idea. The bank itself would need a fairly substantial capital backing when it first opens, in BTC and probably a "real" currency like USD. I'm very interested in this and if anyone has the programming skills to create such a thing, I'd be happy to pay you, in American greenbacks.

As stated earlier, I'm seriously thinking and exploring the idea... As a business man, however the first thing is to have a concrete business plan.

As such that is what I'm doing with now, trying to balance the potential books, how much investment, how to generate profits, share-holders or not?, advantage to users, etc.

Ironically given the current state of main economy banks, banking is all about trust... And that is a hard thing to get, for a bank to succeed, at the beginning it has to inspire confidence that it can keep you money safe and knows how to grew it (for interest and share-holders).

One possibility I've considered is to follow the model of the co-operative banks (AKA building societies) in the UK. On these there are no share-holders or owners except the customers. Your deposit with the bank, entitles you to a dividend each years based on the profits made.

[Anders]

The problem with a Bitcoin bank is that the bank would have to lend out their customers' bitcoins to other customers, because in contrast to ordinary money, bitcoins cannot be created out of thin air, plus bitcoins are inherently deflationary so for the bank to buy bitcoins just to lend out would require huge interest rates in order to become profitable. Also, while this has worked for ordinary banks, people today would perhaps demand that there can be no run on a bank dealing with digital currencies, i.e. that the bank is able to pay back all their customers' money if they all should demand it all at once.

[ffe]

The problem with a Bitcoin bank is that the bank would have to lend out their customers' bitcoins to other customers, because in contrast to ordinary money, bitcoins cannot be created out of thin air, plus bitcoins are inherently deflationary so for the bank to buy bitcoins just to lend out would require huge interest rates in order to become profitable. Also, while this has worked for ordinary banks, people today would perhaps demand that there can be no run on a bank dealing with digital currencies, i.e. that the bank is able to pay back all their customers' money if they all should demand it all at once.

You avoid runs completely if accounts are not on demand accounts. Mainstream banks used to do that with time deposits that paid interest and demand accounts that were free or cost a small fee. No reason a bitcoin bank can't do the same.

On the other hand a bitcoin bank would have a tough time making sense. Bitcoins will always increase in value so a business borrowing bitcoin from a bank would have to estimate that increase and add it to the cost of money when creating its business plan. It just doesn't make sense to borrow in bitcoins unless there is absolutely no alternative.

This is unfortunate because the people holding wealth are not always the people with the great business ideas. If you don't have a mechanism in place to utilize the wealth to create business you are running at a much lower efficiency. This is why I've come to believe bitcoin will be a great store of wealth but never a unit of account (for loans in this case.)

[Anders]

The problem with a Bitcoin bank is that the bank would have to lend out their customers' bitcoins to other customers, because in contrast to ordinary money, bitcoins cannot be created out of thin air, plus bitcoins are inherently deflationary so for the bank to buy bitcoins just to lend out would require huge interest rates in order to become profitable. Also, while this has worked for ordinary banks, people today would perhaps demand that there can be no run on a bank dealing with digital currencies, i.e. that the bank is able to pay back all their customers' money if they all should demand it all at once.

You avoid runs completely if accounts are not on demand accounts. Mainstream banks used to do that with time deposits that paid interest and demand accounts that were free or cost a small fee. No reason a bitcoin bank can't do the same.

On the other hand a bitcoin bank would have a tough time making sense. Bitcoins will always increase in value so a business borrowing bitcoin from a bank would have to estimate that increase and add it to the cost of money when creating its business plan. It just doesn't make sense to borrow in bitcoins unless there is absolutely no alternative.

This is unfortunate because the people holding wealth are not always the people with the great business ideas. If you don't have a mechanism in place to utilize the wealth to create business you are running at a much lower efficiency. This is why I've come to believe bitcoin will be a great store of wealth but never a unit of account (for loans in this case.)

Ah, yes the bank can demand that the bitcoins their customers have saved will be frozen for a year for example in order to give interest. But even then customers could demand all their bitcoins all at once which would cause a run on the bank.

The deflation rate of bitcoins may not be a problem on a second thought, because when the bank lends out bitcoins it expects the customer to also pay back the loan in bitcoins (or the equivalent value). But as you said, a borrower would also take into account the deflation rate of the bitcoins, and that may make the customers reluctant to borrow money from the bank.

[chaunceyG]

Pixie, I think your idea of a depositor owned bank is the only way.  That is why I don't like to use the word bank to begin with. What I am really looking to create is more like a collection of one-off Bitcoin investment trusts or venture capital funds depending on the structure of the loan.  Really all the business itself would do is help to facilitate the transactions.  Such services could include connecting investors with borrowers, bookkeeping, evaluating creditworthiness, standardizing contracts, and legal services, etc.  For these services, the Bitbank would charge fees.  These fees then flow back to the member's of the Bitbank community in the same way a thrift works. This not only captures the spirit of community lending and investment, but ensures that their is no conflict of interest between those running the bank and the "depositors", because the two are one-in-the-same.  Again, I'd like to work with anyone to help set this up. Is there a good way of getting in touch via email?

[Anders]

The problem with bitcoins from a banking perspective is that it is difficult to create Bitcoin credits. With ordinary money creating credits is not only easy, it's a must.

[markm]

What circumstances force people to borrow bitcoins instead of, for example, borrowing enough fiat currency to buy such bitcoins as they desire or need?

Doesn't it make more sense to borrow something else and buy bitcoins than to borrow bitcoins and use them to buy something else?

(Unless you expect the "something else" to appreciate in value faster than bitcoins.)

-MarkM-

[tymothy]

The problem with bitcoins from a banking perspective is that it is difficult to create Bitcoin credits. With ordinary money creating credits is not only easy, it's a must.

Why? Interest and loans and a banking system existed under more or less fixed supply non-fiat money systems for hundreds of years.

[tymothy]

What circumstances force people to borrow bitcoins instead of, for example, borrowing enough fiat currency to buy such bitcoins as they desire or need?

Doesn't it make more sense to borrow something else and buy bitcoins than to borrow bitcoins and use them to buy something else?

(Unless you expect the "something else" to appreciate in value faster than bitcoins.)

-MarkM-

If there's a difference in prices for a given good, borrowing in bitcoins could be favorable. If you have a $100 USD good and the seller accepts either $100 USD or 10 BTC when the exchange rate of BTC is 1BTC to 7 USD, you could have pressure to use BTC directly. If the seller feel bitcoins (deflationary) are going to hold their value or appreciate in value better than the inflationary USD, the seller may price their goods based on what they feel the currency they receive will be worth when they go to use it, that is, better than the current exchange rate.