BitCoin Bank

[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.

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

Yes, loans, but I mean credits as in money created out of thin air. Today when banks create a loan they only need to have 10% of that loan as real assets to back it up. The rest, the 90%, is thin air. Bitcoins cannot be created out of thin air, only through massive comping resources.

[fergalish]

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?

Isn't this more or less what the global bitcoin stock exchange does?  glbse.com

[charlie]

I'd be interested in helping in this, i could be the graphic designer (make logos, advert banners, videos etc)

And as this forum has pretty much only computer nerds i think we would be the only un-hackable bank xD

[ene]

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.

Yes, loans, but I mean credits as in money created out of thin air. Today when banks create a loan they only need to have 10% of that loan as real assets to back it up. The rest, the 90%, is thin air. Bitcoins cannot be created out of thin air, only through massive comping resources.

That's not how fractional reserve works at all...

[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.

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

Yes, loans, but I mean credits as in money created out of thin air. Today when banks create a loan they only need to have 10% of that loan as real assets to back it up. The rest, the 90%, is thin air. Bitcoins cannot be created out of thin air, only through massive comping resources.

That's not how fractional reserve works at all...

Check out this documentary called Money as Debt: http://www.youtube.com/watch?v=Dc3sKwwAaCU

It's a simplified explanation but that it how fractional reserve banking works. What do you think the word 'fractional' means? 

[kjj]

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.

Yes, loans, but I mean credits as in money created out of thin air. Today when banks create a loan they only need to have 10% of that loan as real assets to back it up. The rest, the 90%, is thin air. Bitcoins cannot be created out of thin air, only through massive comping resources.

That's not how fractional reserve works at all...

Sadly, that really is how it works.  Except that it is actually 100% that is created out of thin air, not 90%.  But then the bank can borrow money (from depositors, other banks, or the fed) until they have sufficient reserves.

[fergalish]

Sadly, that really is how it works.  Except that it is actually 100% that is created out of thin air, not 90%.  But then the bank can borrow money (from depositors, other banks, or the fed) until they have sufficient reserves.

And even worse, very often the 10% which is supposedly "real assets" can often consist of very shaky assets - the kind of mish-mash securitized sub-prime mortgage bundles that get artificially high ratings and so can count fully to a bank's reserves, when in fact, they were worth ~10¢ on the dollar when the reckoning came.

[deti]

My concern is more how will you assure the money the bank holds?

Lets say a bank has 1.000.000 BTC from his account holders and then all wallets are destroyed by a software fault, corruption, virus or even a Solar Storm that destroys the bank-wallet. How do you want to manage the insurance?
1.000.000 out of the total 21.000.000 BTC ever created is equal in value to
  952.380 out of the left 20.000.000 BTC.
So the bank needs this amount of BTC to pay the account holder for the lost BTC. How will the bank pay the insurance premium for this huge insurance sum? Who will be the insurer?
The bank may not loose this amount, but if a normal bank burns, the paper money can be printed again for a much smaller fee - not so the BTC.

How do you want to manage this?

[ene]

Hi deti, yes it's impossible to regulate banks so it will effectively be a "free banking" system, banks can suffer a bank run or even, if they are as bad as you suggest, effectively disappear. Presumably some of them will be real legal organisations with a contract where they provide you with some USD instead if they run out of BTC or even lose them as you suggest. Also I hope no one bank would be as big as all that, it would be quite scary.

[alexk]

I think a bitcoin bank can not work.

A bank earns money by collecting money from depositors and offering them interest in return. The bank uses this money as a fractional reserve, and lends more money to creditors and expects interest in return. The interest for the depositors is being paid for by the interest of the creditors.

In a strongly deflationary environment it's not easy for the creditor to pay back the loan, because by the time the credit falls due for payment the money is already worth more. For the creditor to be able to pay a positive interest rate, his business needs an roi > deflation rate. Many businesses will not be able to provide this when the deflation rate becomes high. Then lending out money for a bitcoin bank will hardly be possible which also makes paying interest to depositors hardly possible.

So, in my opinion, there is no incentive to put bitcoins in a bitcoin bank.

If bitcoins had a stable value, this problem would not exist.


alexk

[benjamindees]

Lots of big banks these days don't pay much in the way of interest, half a percent or so.  And their loan business is crap.  They make money on credit cards and transaction fees.

[alexk]

Lots of big banks these days don't pay much in the way of interest, half a percent or so.  And their loan business is crap.  They make money on credit cards and transaction fees.

So credit cards are not loan business?

[benjamindees]

Lots of big banks these days don't pay much in the way of interest, half a percent or so.  And their loan business is crap.  They make money on credit cards and transaction fees.

So credit cards are not loan business?

Yeah consumer credit isn't technically a loan.

http://en.wikipedia.org/wiki/Credit_%28finance%29

[ene]

That page doesn't say consumer credit isn't a loan.

A thing lent; something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given; esp. a sum of money lent on these conditions, and usually at interest.

[alexk]

Lots of big banks these days don't pay much in the way of interest, half a percent or so.  And their loan business is crap.  They make money on credit cards and transaction fees.

So credit cards are not loan business?

Yeah consumer credit isn't technically a loan.

http://en.wikipedia.org/wiki/Credit_%28finance%29

I don't see anything in that wikipedia article supporting your argument. Can you point it out please?

http://en.wikipedia.org/wiki/Loan

According to this article though, credit card debt is an unsecured loan.


The discussion if a credit card debt is a loan or not is irrelevant to my first argument anyway. A Bitcoin Bank can not give out interest at all, because there is no way it can profitably lend money in huge amounts to debtors. So there is no financial incentive to put your Bitcoins in a Bitcoin Bank and i think this prevents Bitcoin Banks from having any success, as long as the bitcoin money supply scheme stays deflationary.


alexk

[benjamindees]

Sheesh, you can't read the first paragraph?

Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date. The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services (e.g. consumer credit).

Consumer credit is vendor finance.  The point is to get people to purchase stuff, not to pay interest.

[alexk]

Lots of big banks these days don't pay much in the way of interest, half a percent or so.  And their loan business is crap.  They make money on credit cards and transaction fees.

So credit cards are not loan business?

Yeah consumer credit isn't technically a loan.

http://en.wikipedia.org/wiki/Credit_%28finance%29

Ok, i think i understand now. You are mistaking credit cards for consumer credit. These are not the same. Consumer credit means, that someone has to pay for a product at a later point in time and is charged interest in return. Credit card debt is a loan, which also costs interest.


alexk

[benjamindees]

Well, in the US, credit card debt is normally a loan of goods or services, when it's not a cash advance.  So it's consumer credit.  I'm not sure what the definition is wherever you live.

Regardless, loaning Bitcoins isn't required for such services; and they can support a Bitcoin bank perfectly well.

[alexk]

Well, in the US, credit card debt is normally a loan of goods or services, when it's not a cash advance.  So it's consumer credit.  I'm not sure what the definition is wherever you live.

Regardless, loaning Bitcoins isn't required for such services; and they can support a Bitcoin bank perfectly well.

Ok, you can continue making up your own definitions. According to http://en.wikipedia.org/wiki/Loan credit card debt is an unsecured loan, which i already pointed out. This will be my last post regarding this subject, i'm not here to argue about definitions.

If you can show me a way how a bitcoin bank can pay
1. interest to its depositors or
2. earn money by lending
i will be happy to continue with the discussion.


alexk

[Havoc]

Fractional banking works as well with bitcoins as with any other asset.

Person A deposits 100 BTC at the bank and gets interest. He can withdraw them at any time.

Person B loans 90 BTC from the bank and pays interest. He have to pay back within a year.

The bank only has 10 BTC but have promised to be able to give A back his full 100 BTC at any time. This makes it a fractional reserv bank with a 10% reserv. If A want to withdraw more than 10 BTC the bank will have to take a loan to cover it, but as it isn't sure the bank can get this loan A can lose his money.

Some argue that the total ammount of BTC in this example is now 190, and that the bank has fraudulently created 90 BTC. If this is the case or not is a matter of definition but as long as the depositer knows about the fractional nature of the bank, I would not call it fraud.