9 ms·

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).

beefield 6y ago
1. Fractional reserve banking is by definition decentralized. 2. Cough, Tether audits, cough.
- ryebit 6y ago
  Not OP, but USDT / Tether is an example of something which exists as a proxy for something off-chain; so auditing the chain is obviously not going to work to see how much USD they actually have. Though it is possible to provably audit exactly how many USDT are in circulation at any point. I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly there (rather than as a proxy for real shares tracked somewhere else). In that frame, a better example is something like the DAI stablecoin, which is backed by assets that are on-chain. So at any block, you can audit exactly how many DAI there are, exactly which assets exist to back it, and exactly what the last reported oracle prices are for those assets.
  - ryebit 6y ago
    Just to expound on that point here. While Tether's bank accounts being private is a problem for auditing, even if that were removed, you'd still have to somehow "snapshot" all the bank accounts an transactions, freezing things in time so you could ensure there wasn't a shell game going on while you audited. This just isn't feasible with a federated system where each bank has their own ledger, and asynchronously tries to align it with a bunch of other ledgers. Blockchains overall reduce throughput compared to this model, because they enforce a single ledger. But they do this while still preserving decentralized control, resulting in a tradeoff where you lose some scalability, but also remove need for a trusted mediator(s), and now anyone can audit a snapshot of the state at their leisure.
arcticbull 6y ago
Fractional reserve banking in the real economy is utterly irrelevant thanks to the FDIC backstopping a run. In the last [edit: 88] years nobody had lost a single penny to a bank run or default including 2008s WaMu default thanks to the FDIC. Crypto fractional reserve like tether has no backstop and that’s a completely different beast. It’s what exacerbated the Great Depression. As with all blockchain unless the state is 100% totally and utterly encapsulated within the blockchain, then it’s garbage in, garbage immutably recorded. Which is why the only thing you can do with crypto is currency and kitties.
- nayuki 6y ago
  Short-selling shares is basically a form of fractional reserve banking. A short squeeze is essentially equivalent to a bank run. Where is the FDIC helping to backstop a run on shares?
  - arcticbull 6y ago
    It’s not a bank run, it’s poor risk management and the FDIC doesn’t insure brokerages, that’s the SIPC. Poor risk management is very much not covered by any federal program. Their liabilities are between them and their brokers, and if contagion spreads, their private insurers. This is why you can only short in a margin account and are required to put up collateral. If you sold short 140% of float and bought calls to cover, then we wouldn’t be having this conversation. Play stupid games, win stupid prizes. Similarly if I bought a bunch of stuff on margin and it went under overnight, RIP my account. You can lose money in both directions. “140% of float” doesn’t really mean more shares were sold than exist. There are after all only 100%. It means the same shares were sold more than once by the same or different people, and buying them back cancels the debt obligation.
  - ashtonkem 6y ago
    From a social level, there is a huge difference between a bank run and a short squeeze. One affects regular savings, the other wipes out only those that opted into a high risk short position.
xadhominemx 6y ago
No blockchain would ever be able to keep with with equities trading
- arcticbull 6y ago
  In which case of course the trading has to happen on totally unaudited, unauditable exchanges like Bittrex’ (GME:USDT) pair and settled on the blockchain - which is absolute free for all in terms of shenanigans.
- wcoenen 6y ago
  It is being tested already: https://www.globalcustodian.com/paxos-teams-credit-suisse-instinet-launch-blockchain-settlement-system/ https://www.globalcustodian.com/paxos-teams-credit-suisse-in...
- jkhdigital 6y ago
  Blockchain doesn’t keep up with Bitcoin trading either, but you can always withdraw your assets to a private wallet and not have to worry about getting Mt. Gox’d. There’s no way to “withdraw” securities from the opaque financial system, so you are always at risk of fraud.
  - xadhominemx 6y ago
    I guess why that’s why there’s never any fraud in the blockchain ecosystem
andrepd 6y ago
Well fractional reserve banking is accounting fraud. Widespread and legal, but fraud nevertheless. Also fractional reserve banking is a thing of the past. We've now evolved to no reserve banking. The banks' ability to create money from thin air is almost unrestrained.
- arcticbull 6y ago
  No it’s not. It’s legal and permitted and therefore not fraud. It’s backstopped to prevent losses. This is a talking point with no basis. Let’s stick to fact.
  - kleton 6y ago
    > As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Not fraud though, because "When the president does it, that means it is not illegal"
    - arcticbull 6y ago
      It’s not fraud in the same way going to prison isn’t kidnapping.
      - heavenlyblue 6y ago
        It is when government is corrupt
        arcticbull 6y ago
        No. Lol. We’re talking about a strict definition here. You have other issues in that situation, though.
  - andrepd 6y ago

beefield 6y ago

1. Fractional reserve banking is by definition decentralized. 2. Cough, Tether audits, cough.

ryebit 6y ago
Not OP, but USDT / Tether is an example of something which exists as a proxy for something off-chain; so auditing the chain is obviously not going to work to see how much USD they actually have. Though it is possible to provably audit exactly how many USDT are in circulation at any point. I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly there (rather than as a proxy for real shares tracked somewhere else). In that frame, a better example is something like the DAI stablecoin, which is backed by assets that are on-chain. So at any block, you can audit exactly how many DAI there are, exactly which assets exist to back it, and exactly what the last reported oracle prices are for those assets.
- ryebit 6y ago
  Just to expound on that point here. While Tether's bank accounts being private is a problem for auditing, even if that were removed, you'd still have to somehow "snapshot" all the bank accounts an transactions, freezing things in time so you could ensure there wasn't a shell game going on while you audited. This just isn't feasible with a federated system where each bank has their own ledger, and asynchronously tries to align it with a bunch of other ledgers. Blockchains overall reduce throughput compared to this model, because they enforce a single ledger. But they do this while still preserving decentralized control, resulting in a tradeoff where you lose some scalability, but also remove need for a trusted mediator(s), and now anyone can audit a snapshot of the state at their leisure.

arcticbull 6y ago

Fractional reserve banking in the real economy is utterly irrelevant thanks to the FDIC backstopping a run. In the last [edit: 88] years nobody had lost a single penny to a bank run or default including 2008s WaMu default thanks to the FDIC. Crypto fractional reserve like tether has no backstop and that’s a completely different beast. It’s what exacerbated the Great Depression. As with all blockchain unless the state is 100% totally and utterly encapsulated within the blockchain, then it’s garbage in, garbage immutably recorded. Which is why the only thing you can do with crypto is currency and kitties.

nayuki 6y ago
Short-selling shares is basically a form of fractional reserve banking. A short squeeze is essentially equivalent to a bank run. Where is the FDIC helping to backstop a run on shares?
- arcticbull 6y ago
  It’s not a bank run, it’s poor risk management and the FDIC doesn’t insure brokerages, that’s the SIPC. Poor risk management is very much not covered by any federal program. Their liabilities are between them and their brokers, and if contagion spreads, their private insurers. This is why you can only short in a margin account and are required to put up collateral. If you sold short 140% of float and bought calls to cover, then we wouldn’t be having this conversation. Play stupid games, win stupid prizes. Similarly if I bought a bunch of stuff on margin and it went under overnight, RIP my account. You can lose money in both directions. “140% of float” doesn’t really mean more shares were sold than exist. There are after all only 100%. It means the same shares were sold more than once by the same or different people, and buying them back cancels the debt obligation.
- ashtonkem 6y ago
  From a social level, there is a huge difference between a bank run and a short squeeze. One affects regular savings, the other wipes out only those that opted into a high risk short position.

xadhominemx 6y ago

No blockchain would ever be able to keep with with equities trading

arcticbull 6y ago
In which case of course the trading has to happen on totally unaudited, unauditable exchanges like Bittrex’ (GME:USDT) pair and settled on the blockchain - which is absolute free for all in terms of shenanigans.
wcoenen 6y ago
It is being tested already: https://www.globalcustodian.com/paxos-teams-credit-suisse-instinet-launch-blockchain-settlement-system/ https://www.globalcustodian.com/paxos-teams-credit-suisse-in...
jkhdigital 6y ago
Blockchain doesn’t keep up with Bitcoin trading either, but you can always withdraw your assets to a private wallet and not have to worry about getting Mt. Gox’d. There’s no way to “withdraw” securities from the opaque financial system, so you are always at risk of fraud.
- xadhominemx 6y ago
  I guess why that’s why there’s never any fraud in the blockchain ecosystem

andrepd 6y ago

Well fractional reserve banking is accounting fraud. Widespread and legal, but fraud nevertheless. Also fractional reserve banking is a thing of the past. We've now evolved to no reserve banking. The banks' ability to create money from thin air is almost unrestrained.

arcticbull 6y ago
No it’s not. It’s legal and permitted and therefore not fraud. It’s backstopped to prevent losses. This is a talking point with no basis. Let’s stick to fact.
- kleton 6y ago
  > As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Not fraud though, because "When the president does it, that means it is not illegal"
  - arcticbull 6y ago
    It’s not fraud in the same way going to prison isn’t kidnapping.
    - heavenlyblue 6y ago
      It is when government is corrupt
      - arcticbull 6y ago
        No. Lol. We’re talking about a strict definition here. You have other issues in that situation, though.
- andrepd 6y ago