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Regardless of whether the banks deserved to fall after 2008 or not, I'm struggling to of any way in which things would have been different with cryptocurrencies

Regardless of whether the banks deserved to fall after 2008 or not, I'm struggling to of any way in which things would have been different with cryptocurrencies. Do you seriously think that one wouldn't be able to construct fraudulent financial instruments on top of cryptocurrencies just like you can with the regular financial system? If you think that there is a difference in this regard I recommend you investigate how these financial instruments were actually constructed.

ozim 8y ago
Not that long ago there was this article posted on HN: https://hacked.com/last-years-crypto-boom-was-fixed-researchers/ https://hacked.com/last-years-crypto-boom-was-fixed-research...
lifty 8y ago
Perhaps one fundamental difference between the normal financial system and the more popular cryptocurrencies is in the way the money supply is managed. In the traditional system money becomes very cheap in specific periods, coincidentally or not right before major crisis events, which can act as gas on fire. In contrast, cryptocurrencies like Bitcoin or Ethereum have a more restrained issuance schedule, which some people or schools of economic thought argue that can lead to better emergent outcomes in the overall economy, avoid the boom and bust cycle. But of course, you can still build financial tricks based on them, but they might not have the same effect on the overall economy.
- gmueckl 8y ago
  No. I could go and found a bitcoin bank in which anyone can open an account. The catch? The bank runs a single wallet to back all accounts. The only promise made by the bank is that if you deposit X bitcoins, you'll get X bitcoins back when you request to withdraw them. I'll also allow you instant transfers between the accounts. They are off the blockchain, managed only in the bank's database, so these transactions can be arbitrarily fast. If the wallet accumulates enough bitcoins so that it exceeds the normal volume of deposits and withdrawals, I'll take the rest and put them to work. Maybe buy shares in companies or so. I'll keep the earnings of these investments. If I make a loss, I'll have to recover the loss somehow. That's the risk I take. At that point, I'd have created virtual bitcoins in the market. And who would be stopping me?
  - lifty 8y ago
    That outcome is certainly possible. But even that scenario would be quite a departure from what we have now, where banks have almost no reserve requirement and they can create as much money as can be absorbed in the economy, which in turn is influenced mainly by central bank interest rate. Lending money entails risk and in a situation where the interest is set by a central bank and there are little to no reserve requirements, that risk gets shifted to the population that has to bailout the banks. In the scenario that you outlined, its probable that the reserve would much higher than the current 1-3%, which would lead to risk being more directly held by the bank making the loans and the depositors of that bank. And the argument goes that this might lead to more skin in the game and probably less reckless behaviour. Also, in such a system interest rates would be set by the market, based on the amounts of savings in the economy and the demand for loans.
    - deleted 8y ago
      [deleted]
    - lokedhs 8y ago
      I just don't see your reasoning. By what mechanism that is not provided today would the banks stop doing what they do today? What mechanism would control the exposure that banks take on?
      - lifty 8y ago
        Bitcoin and other cryptocurrencies are easier to store securely compared to bunches of cash, which would lead to less pressure to store them in a bank. Deposits would be incentivised using interest rates (set by the market). That and the banks not being able to create money would lead to them being more dependent on deposits; this in turn would put more pressure on banks that exhibit risky behaviour and favour banks that keep a healthy balance sheet. And why would there be more pressure to adjust risky behaviour? Because people would take their money out of banks that exhibit that behaviour, which would re-inforce behaviour that has the right ratio of risk/return. This does not happen now because banks don't need almost any deposits to make profit. This risk adjustment already happens in financial sectors that have skin in the game. For example, if a hedge fund looses money, sooner or later people will take their money out of it.
andrepd 8y ago
Please reread my last sentence.

ozim 8y ago

Not that long ago there was this article posted on HN: https://hacked.com/last-years-crypto-boom-was-fixed-researchers/ https://hacked.com/last-years-crypto-boom-was-fixed-research...

lifty 8y ago

Perhaps one fundamental difference between the normal financial system and the more popular cryptocurrencies is in the way the money supply is managed. In the traditional system money becomes very cheap in specific periods, coincidentally or not right before major crisis events, which can act as gas on fire. In contrast, cryptocurrencies like Bitcoin or Ethereum have a more restrained issuance schedule, which some people or schools of economic thought argue that can lead to better emergent outcomes in the overall economy, avoid the boom and bust cycle. But of course, you can still build financial tricks based on them, but they might not have the same effect on the overall economy.

gmueckl 8y ago
No. I could go and found a bitcoin bank in which anyone can open an account. The catch? The bank runs a single wallet to back all accounts. The only promise made by the bank is that if you deposit X bitcoins, you'll get X bitcoins back when you request to withdraw them. I'll also allow you instant transfers between the accounts. They are off the blockchain, managed only in the bank's database, so these transactions can be arbitrarily fast. If the wallet accumulates enough bitcoins so that it exceeds the normal volume of deposits and withdrawals, I'll take the rest and put them to work. Maybe buy shares in companies or so. I'll keep the earnings of these investments. If I make a loss, I'll have to recover the loss somehow. That's the risk I take. At that point, I'd have created virtual bitcoins in the market. And who would be stopping me?
- lifty 8y ago
  That outcome is certainly possible. But even that scenario would be quite a departure from what we have now, where banks have almost no reserve requirement and they can create as much money as can be absorbed in the economy, which in turn is influenced mainly by central bank interest rate. Lending money entails risk and in a situation where the interest is set by a central bank and there are little to no reserve requirements, that risk gets shifted to the population that has to bailout the banks. In the scenario that you outlined, its probable that the reserve would much higher than the current 1-3%, which would lead to risk being more directly held by the bank making the loans and the depositors of that bank. And the argument goes that this might lead to more skin in the game and probably less reckless behaviour. Also, in such a system interest rates would be set by the market, based on the amounts of savings in the economy and the demand for loans.
  - deleted 8y ago
    [deleted]
  - lokedhs 8y ago
    I just don't see your reasoning. By what mechanism that is not provided today would the banks stop doing what they do today? What mechanism would control the exposure that banks take on?
    - lifty 8y ago
      Bitcoin and other cryptocurrencies are easier to store securely compared to bunches of cash, which would lead to less pressure to store them in a bank. Deposits would be incentivised using interest rates (set by the market). That and the banks not being able to create money would lead to them being more dependent on deposits; this in turn would put more pressure on banks that exhibit risky behaviour and favour banks that keep a healthy balance sheet. And why would there be more pressure to adjust risky behaviour? Because people would take their money out of banks that exhibit that behaviour, which would re-inforce behaviour that has the right ratio of risk/return. This does not happen now because banks don't need almost any deposits to make profit. This risk adjustment already happens in financial sectors that have skin in the game. For example, if a hedge fund looses money, sooner or later people will take their money out of it.

andrepd 8y ago

Please reread my last sentence.