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There is a subtle distinction though. When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t tech

There is a subtle distinction though. When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. In contrast, crypto lenders can’t create new bitcoin. They need deposits to lend out. The depositer in turn is aware they don’t hold real bitcoin, just a deposit credit at the lender. This is the origin of the crypto mantra “Not your keys, not your crypto.” It’s true that the “M1” value can increase, but unlike fiat money the distinction is (for now) visible to the user.

jpmattia 6y ago
> When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. This is exactly wrong. In fact, it is the origin of the term "fractional reserve": They are reserving a fraction of the deposits and lending out the rest.
- marcell 6y ago
  Right, but in crypto world most people regard coins held in custody as different from coins held in a private wallet. The Mt Gox experience was a good lesson on this topic, if it’s not your keys, it’s not your bitcoin. In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve.
  - jpmattia 6y ago
    > In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve. I would add the words "in the modern era". My grandparents generation regarded those two as very different, having lived through the bank runs of the depression. The difference between their gen and mine is due to the advent of the FDIC. This would also address your point about Mt Gox: Had there been insurance, Mt Gox would not have been such a clusterfk. So no surprise: Coinbase and Bakkt both tout the insurance of their holdings. It's not quite FDIC levels (ie, a defacto government backing) but it's getting closer. As a consequence, it is not too hard for me to imagine a time that custodial accounts will have nearly the same confidence as a private wallet, because the equivalent of FDIC will likely be created by bitcoin-based institutions.

jpmattia 6y ago

> When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. This is exactly wrong. In fact, it is the origin of the term "fractional reserve": They are reserving a fraction of the deposits and lending out the rest.

marcell 6y ago
Right, but in crypto world most people regard coins held in custody as different from coins held in a private wallet. The Mt Gox experience was a good lesson on this topic, if it’s not your keys, it’s not your bitcoin. In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve.
- jpmattia 6y ago
  > In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve. I would add the words "in the modern era". My grandparents generation regarded those two as very different, having lived through the bank runs of the depression. The difference between their gen and mine is due to the advent of the FDIC. This would also address your point about Mt Gox: Had there been insurance, Mt Gox would not have been such a clusterfk. So no surprise: Coinbase and Bakkt both tout the insurance of their holdings. It's not quite FDIC levels (ie, a defacto government backing) but it's getting closer. As a consequence, it is not too hard for me to imagine a time that custodial accounts will have nearly the same confidence as a private wallet, because the equivalent of FDIC will likely be created by bitcoin-based institutions.