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How does a nation expand credit with a cryptocurrency? Like as in the case with fractional reserve banking?

by ohiovr 9y ago

supercanuck 9y ago
it doesn't.
habosa 9y ago
Here are some thoughts on how it could work. Not completely thought out, but something: Before we had electronic bank records, banks could print "bank notes" which were as good as money if you trusted the bank. Now that we have electronic records they basically "create" USD by adding a deposit to your account while only having ~10% of that actually stored away in dollars. If your account was truly in BTC they obviously couldn't just increase your balance, since it's a cryptocurrency and they can't just make something up. One option would be for banks to have their own tokens, similar to bank notes of old. All banks would accept the tokens of other banks 1:1 and convert them to BTC on demand, but it would allow expansion of the "money supply" like we have now with dollars.
- baddox 9y ago
  Any online site that sells bitcoins for fiat, like Coinbase, could just keep the fiat (or use it for anything other than obtaining bitcoins) and increment your bitcoin balance. Their total bitcoin holding may be less than the sum of their users’ balances, and no one would notice unlrsss there was a “run” of users attempting to withdraw bitcoins into their own real wallets. We’d probably all consider that blatant fraud.
- AlexandrB 9y ago
  > One option would be for banks to have their own tokens, similar to bank notes of old. All banks would accept the tokens of other banks 1:1 and convert them to BTC on demand, but it would allow expansion of the "money supply" like we have now with dollars. Why not create one big bank that can issue its own tokens that any bank will accept? We can call it a "central bank" or something. And then maybe after many years we can decouple the value of these central tokens from the value of bitcoin, instead allowing the central bank to control the total supply of tokens based on some kind of "monetary policy" to keep prices stable. Sounds good. The future of crytocurrency is bright indeed!
gumby 9y ago
Unfortunately it has all the disadvantages of a hold based system. It also has the advantages, but imho those are essentially nonexistent in any practical sense (yes, inunderstand there is a political argument otherwise). In the hope avoid down voting, in case you don’t know the problem of gold standards are three serious ones. First, it’s deflationary as the gold supply doesn’t change as economic growth occurs. Second, it’s decoupled from economic activity (e.g. you increase the money supply every time you use a credit card and decrease it when you pay off your bill — and that’s only one example). Third, it can suffer inflationary crises (yes, despite being deflationary!) when there’s a big gold strike (as happened with the California, Yukon, and Victorian strikes, among many others). The argument FOR it is that governments can just print money if they get into trouble and inflate the currency. This usually screws the people doing the inflating as well (see: Venezuela) but can be pretty dreadful (e.g. Weimar). But the problems above are also terrible.
lojack 9y ago
The same way we do with cash. When you put your cryptos in a bank they will lend out some portion of it and in return you'll be paid out some interest rate. The incentive to storing your crypto in a bank will be that you receive that interest rate, potentially that its insured, and that its secured. Perhaps the interest rates will need to be higher to encourage someone to deposit their cryptocurrency in a bank, its hard to say.
mr_toad 9y ago
A nation-state (or bank, or a credit company, or an individual) could simply create fiat crypto, the same way they create banknotes, bonds, or IOU's - out of thin air. I.e.: they take gold or similar valuables, and give you a contract for it, authenticated by a blockchain. They can expand this 'money' supply by lending: They create new coins and give them to you _without_ getting your gold right away. In a sense they lend money they don't have. This is basically how fractional reserves operate; everyone hopes that not everyone tries to get the gold back at the same time. And if you think that sounds dodgy, well that's just how banks started out, before paper money was invented, only without the technology to prevent forgery! Unlike IOU's and other form's of fiat, some sort of crypto should be immune to forgery, if implemented properly. It's just a tradable contract, backed by a blockchain. However, it still depends on trust and/or legal enforcement (hopefully the later) that the gold will be there to paid out on demand. Like any other fractional reserve banking system, enough bad-debts can cripple it, and it is not immune to collapse if there is ever a 'run' on it. The next trick (once everyone is accustomed to exchanging crypto) is to have everyone accept that instead of getting their gold back (ever), you'll allow people to use the crypto to offset their tax liability. Voila - money for nothing!

How does a nation expand credit with a cryptocurrency? Like as in the case with fractional reserve banking?

by ohiovr 9y ago

How does a nation expand credit with a cryptocurrency? Like as in the case with fractional reserve banking?

supercanuck 9y ago

it doesn't.

habosa 9y ago

Here are some thoughts on how it could work. Not completely thought out, but something: Before we had electronic bank records, banks could print "bank notes" which were as good as money if you trusted the bank. Now that we have electronic records they basically "create" USD by adding a deposit to your account while only having ~10% of that actually stored away in dollars. If your account was truly in BTC they obviously couldn't just increase your balance, since it's a cryptocurrency and they can't just make something up. One option would be for banks to have their own tokens, similar to bank notes of old. All banks would accept the tokens of other banks 1:1 and convert them to BTC on demand, but it would allow expansion of the "money supply" like we have now with dollars.

baddox 9y ago
Any online site that sells bitcoins for fiat, like Coinbase, could just keep the fiat (or use it for anything other than obtaining bitcoins) and increment your bitcoin balance. Their total bitcoin holding may be less than the sum of their users’ balances, and no one would notice unlrsss there was a “run” of users attempting to withdraw bitcoins into their own real wallets. We’d probably all consider that blatant fraud.
AlexandrB 9y ago
> One option would be for banks to have their own tokens, similar to bank notes of old. All banks would accept the tokens of other banks 1:1 and convert them to BTC on demand, but it would allow expansion of the "money supply" like we have now with dollars. Why not create one big bank that can issue its own tokens that any bank will accept? We can call it a "central bank" or something. And then maybe after many years we can decouple the value of these central tokens from the value of bitcoin, instead allowing the central bank to control the total supply of tokens based on some kind of "monetary policy" to keep prices stable. Sounds good. The future of crytocurrency is bright indeed!

gumby 9y ago

Unfortunately it has all the disadvantages of a hold based system. It also has the advantages, but imho those are essentially nonexistent in any practical sense (yes, inunderstand there is a political argument otherwise). In the hope avoid down voting, in case you don’t know the problem of gold standards are three serious ones. First, it’s deflationary as the gold supply doesn’t change as economic growth occurs. Second, it’s decoupled from economic activity (e.g. you increase the money supply every time you use a credit card and decrease it when you pay off your bill — and that’s only one example). Third, it can suffer inflationary crises (yes, despite being deflationary!) when there’s a big gold strike (as happened with the California, Yukon, and Victorian strikes, among many others). The argument FOR it is that governments can just print money if they get into trouble and inflate the currency. This usually screws the people doing the inflating as well (see: Venezuela) but can be pretty dreadful (e.g. Weimar). But the problems above are also terrible.

lojack 9y ago

The same way we do with cash. When you put your cryptos in a bank they will lend out some portion of it and in return you'll be paid out some interest rate. The incentive to storing your crypto in a bank will be that you receive that interest rate, potentially that its insured, and that its secured. Perhaps the interest rates will need to be higher to encourage someone to deposit their cryptocurrency in a bank, its hard to say.

mr_toad 9y ago

A nation-state (or bank, or a credit company, or an individual) could simply create fiat crypto, the same way they create banknotes, bonds, or IOU's - out of thin air. I.e.: they take gold or similar valuables, and give you a contract for it, authenticated by a blockchain. They can expand this 'money' supply by lending: They create new coins and give them to you _without_ getting your gold right away. In a sense they lend money they don't have. This is basically how fractional reserves operate; everyone hopes that not everyone tries to get the gold back at the same time. And if you think that sounds dodgy, well that's just how banks started out, before paper money was invented, only without the technology to prevent forgery! Unlike IOU's and other form's of fiat, some sort of crypto should be immune to forgery, if implemented properly. It's just a tradable contract, backed by a blockchain. However, it still depends on trust and/or legal enforcement (hopefully the later) that the gold will be there to paid out on demand. Like any other fractional reserve banking system, enough bad-debts can cripple it, and it is not immune to collapse if there is ever a 'run' on it. The next trick (once everyone is accustomed to exchanging crypto) is to have everyone accept that instead of getting their gold back (ever), you'll allow people to use the crypto to offset their tax liability. Voila - money for nothing!