6 ms·

Is fractional lending even possible with bitcoin? And, if not, why do you need reserve capital?

sliverstorm 13y ago
Of course it's possible. Customer A deposits 2 BTC to Bank A Bank A loans 1 BTC to Customer B Bank A is now a fractional reserve bank, with 50% of its outstanding debts to Customer A actually on-hand.
- a8da6b0c91d 13y ago
  But it's kind of like going back to using doubloons as the actual currency, as opposed to certificates. I don't think in practice you could get anywhere like the reserve ratios typical now.
  - sliverstorm 13y ago
    Banks can't print money, so as far as the day-to-day operations of the bank is concerned, the only practical difference between bank notes and doubloons is notes are much easier to process & store!
    - moron4hire 13y ago
      Banks can effectively print money. They can take out loans from the Fed at effectively 0% interest rates, then lend out ten times as much to people. And they can lend to other banks, who they themselves can then lend ten times as much. Banks can print money.
- AnIrishDuck 13y ago
  Sort of. Banks under fractional reserve are limited by a "reserve requirement" [1]. This limits the amount a bank can loan at any time. For example, the reserve requirement imposed on banks in the US today is at most 10% of the bank's liabilities [2]. Bitcoin would impose a 100% reserve requirement that is unheard of (as far as I can tell) in modern banking. I don't believe we can accurately predict the effects of this requirement. I also believe we can't state with any certainty that, given this requirement, a bitcoin banking system would behave at all alike to our current fractional reserve banking system. Frankly, this appears to be another area where bitcoin doesn't seem suited to handle the economic needs of the modern world. 1. http://en.wikipedia.org/wiki/Reserve_requirement http://en.wikipedia.org/wiki/Reserve_requirement 2. http://www.federalreserve.gov/monetarypolicy/reservereq.htm http://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - sliverstorm 13y ago
    In what way does BTC impose a 100% reserve requirement? Unless I'm missing something here, there is nothing stopping a bank from loaning every BTC it takes in deposit, (i.e. 0% reserve requirement) aside from possible federal regulation.
    - moron4hire 13y ago
      Because you can't just make up 10 new bitcoin IDs to be able to lend out against your 1 bitcoin. It would require creating bitcoin-backed bank notes. We'd be back to a reserve currency. Not that I personally think there is anything wrong with a reserve currency, but they tend to significantly curtail the power of governments to wage war, so it's extremely unlikely we'll ever go back to such a system.
      - dragontamer 13y ago
        You mean, like how Mt. Gox has virtual BTCs and virtual USDs in your account? It is far easier to create "virtual currency" than you seem to think.
        moron4hire 13y ago
        So a bitcoin is a cryptographic hash, right? Not much more than a GUID that is truly G and really, really hard to calculate. To make a transaction, you have to check the blockchain of the bitcoin to make sure it hasn't been double-spent, that the person you're receiving the bitcoin from has the right to give you that coin. How would you fraction a bitcoin, thereby allowing 10x spending? You can't just invent new bitcoin hashes, because the creation of valid bitcoin hashes is the mining process itself, and is designed to be time-consuming.
        dragontamer 13y ago
        Sure you can. When you transfer USD into Mt. Gox, you can then buy some "virtual" BTC. The BTC that is in your Mt. Gox account is purely virtual. Until you manually transfer it out of Mt. Gox, you don't even know if those BTC exist yet. I'm not necessarily saying that Mt. Gox is lying to anyone (although they don't strike much confidence in me...). I'm simply stating that the job of lying to the customers is a lot easier than you might think. Take GPL for instance. It "virtually" held BTC for its customers, and one day... they decided to disappear off the face of the internet. Unless those BTC are exactly in a private, offline wallet, you have NO guarantee that you are actually in full possession of those BTC. That is why BTC regulation as a currency is a necessary step forward. If institutions are forced to offer guarantees on the promised value of your BTC Accounts, then life will be a lot easier for the BTC consumers.
deleted 13y ago
[deleted]

Of course it's possible. Customer A deposits 2 BTC to Bank A Bank A loans 1 BTC to Customer B Bank A is now a fractional reserve bank, with 50% of its outstanding debts to Customer A actually on-hand.

a8da6b0c91d 13y ago
But it's kind of like going back to using doubloons as the actual currency, as opposed to certificates. I don't think in practice you could get anywhere like the reserve ratios typical now.
- sliverstorm 13y ago
  Banks can't print money, so as far as the day-to-day operations of the bank is concerned, the only practical difference between bank notes and doubloons is notes are much easier to process & store!
  - moron4hire 13y ago
    Banks can effectively print money. They can take out loans from the Fed at effectively 0% interest rates, then lend out ten times as much to people. And they can lend to other banks, who they themselves can then lend ten times as much. Banks can print money.
AnIrishDuck 13y ago
Sort of. Banks under fractional reserve are limited by a "reserve requirement" [1]. This limits the amount a bank can loan at any time. For example, the reserve requirement imposed on banks in the US today is at most 10% of the bank's liabilities [2]. Bitcoin would impose a 100% reserve requirement that is unheard of (as far as I can tell) in modern banking. I don't believe we can accurately predict the effects of this requirement. I also believe we can't state with any certainty that, given this requirement, a bitcoin banking system would behave at all alike to our current fractional reserve banking system. Frankly, this appears to be another area where bitcoin doesn't seem suited to handle the economic needs of the modern world. 1. http://en.wikipedia.org/wiki/Reserve_requirement http://en.wikipedia.org/wiki/Reserve_requirement 2. http://www.federalreserve.gov/monetarypolicy/reservereq.htm http://www.federalreserve.gov/monetarypolicy/reservereq.htm
- sliverstorm 13y ago
  In what way does BTC impose a 100% reserve requirement? Unless I'm missing something here, there is nothing stopping a bank from loaning every BTC it takes in deposit, (i.e. 0% reserve requirement) aside from possible federal regulation.
  - moron4hire 13y ago
    Because you can't just make up 10 new bitcoin IDs to be able to lend out against your 1 bitcoin. It would require creating bitcoin-backed bank notes. We'd be back to a reserve currency. Not that I personally think there is anything wrong with a reserve currency, but they tend to significantly curtail the power of governments to wage war, so it's extremely unlikely we'll ever go back to such a system.
    - dragontamer 13y ago
      You mean, like how Mt. Gox has virtual BTCs and virtual USDs in your account? It is far easier to create "virtual currency" than you seem to think.
      - moron4hire 13y ago
        So a bitcoin is a cryptographic hash, right? Not much more than a GUID that is truly G and really, really hard to calculate. To make a transaction, you have to check the blockchain of the bitcoin to make sure it hasn't been double-spent, that the person you're receiving the bitcoin from has the right to give you that coin. How would you fraction a bitcoin, thereby allowing 10x spending? You can't just invent new bitcoin hashes, because the creation of valid bitcoin hashes is the mining process itself, and is designed to be time-consuming.
        dragontamer 13y ago
        Sure you can. When you transfer USD into Mt. Gox, you can then buy some "virtual" BTC. The BTC that is in your Mt. Gox account is purely virtual. Until you manually transfer it out of Mt. Gox, you don't even know if those BTC exist yet. I'm not necessarily saying that Mt. Gox is lying to anyone (although they don't strike much confidence in me...). I'm simply stating that the job of lying to the customers is a lot easier than you might think. Take GPL for instance. It "virtually" held BTC for its customers, and one day... they decided to disappear off the face of the internet. Unless those BTC are exactly in a private, offline wallet, you have NO guarantee that you are actually in full possession of those BTC. That is why BTC regulation as a currency is a necessary step forward. If institutions are forced to offer guarantees on the promised value of your BTC Accounts, then life will be a lot easier for the BTC consumers.

deleted 13y ago

[deleted]