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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

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.
        phyalow 13y ago
        MF Global...
- AnIrishDuck 13y ago
  You're right, in a way. But the main issue I'm still struggling with is credit and lending, which are core features of fractional reserve banking. And the more I think about it, the less the "fractional reserve" model makes sense when applied to bitcoin. If memory serves, this is how banking works today (beware, there are gross simplifications in here): 1. Customer A deposits $1 in Bank A 2. Customer B asks Bank A for $9 3. Bank A now needs to borrow $9. It can legally do this because it can prove to the government that its reserves ($1) are greater than 10% of its outstanding liabilities ($9). It first tries other banks, but if all else fails it can borrow from the Fed. 4. Bank A gives $9 to Customer B. I cannot see how step 3 happens in "bitcoin banking". The whole point is that there's no "central point of trust" and hence no lender of last resort. Or to restate, one of fractional reserve banking's key purposes is to influence the money supply. But this is clearly impossible under a "pure bitcoin" system, where the money supply is fixed by fiat.
  - maxerickson 13y ago
    Step 3 doesn't have to happen for money supply expansion to take place. If the bank lends out $0.90 of the $1, people in the economy will be acting like $1.90 of money exists.
    - AnIrishDuck 13y ago
      Right, hence what I said (which is somewhat inaccurate) about a "100% reserve requirement". The bank could lend any amount up to its total deposits, but not above. This is very different than how banking works today. Banks (in the US) can lend up to 1000% of their current deposits. This is a core feature of the fractional reserve system, and is clearly impossible under a pure bitcoin alternative.
      - maxerickson 13y ago
        In practice, they don't. You can compare loans and leases with deposits here (around 75% right now...): http://www2.fdic.gov/SDI/SOB/ http://www2.fdic.gov/SDI/SOB/ I guess you are saying they do accounting shenanigans with the Federal Reserve to make the deposits larger than they really are? (I will admit, I am more interested in aggregate practice here than I am in what the more extreme banks are doing)
iambvk 13y ago
You are assuming deposits and loans both are done in terms of bitcoins. In theory, we can design a banking system that accepts deposits in bitcoins and gives out loans in the fiat currency.
- AnIrishDuck 13y ago
  Right, but you no longer have a "pure bitcoin" banking system. You have a dual currency system that is predicated on the trust of (1) the US government and (2) the bitcoin community. Also, such a system mutes a key feature of current "money multiplier" based systems, which is recursion. Under the current system, when you deposit $100 in a bank, that bank can then lend $10 to nine other people. Who can then each take that $10 and deposit it nine other banks, which can each lend $1 to nine other people... Without this effect, the money multiplier would probably need to be tweaked pretty drastically.
a8da6b0c91d 13y ago
> bitcoin doesn't seem suited to handle the economic needs of the modern world. There's a school of thought that the expansionary fractional reserve system we've had for the last 100+ years has worked OK because more and more fossil fuel energy was available over that time. It's possible we're in a new era where total energy usage will be essentially static, and the current monetary and banking system won't work. I'm not necessarily saying I buy the argument.
- saryant 13y ago
  I think the claim that future energy usage will remain static is largely flawed. For one, a few billion people are currently moving from an annual income of less than $10,000 to closer to $30,000. That's a huge, unprecedented global shift that will lead to a big increase in worldwide energy demand. Second, I think ingenuity will solve our future energy supply issues. A geologist once said "oil is found in the minds of men" and I think that claim holds true for all sources of energy. Look at shale gas: this is a huge energy source that wasn't even in anyone's radar thirty years ago. Moreover, effeciency increases over the next two decades, both in MPG standards, industry and electronics, could yield a savings equivalent to 13 million barrels of oil per day. That's like adding a new Norway and Russia to world energy supplies. Daniel Yergin's book The Quest coveres these future challenges quite well, I highly recommend it.
nhaehnle 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. Slightly tangential to the main topic, but this is a common misunderstanding and incorrect. Bank lending is not constrained by the amount of reserves a bank has, because banks can and do lend each other reserves (or sell each other reserves in exchange for other assets). So banks just make loans regardless of how many reserves they have. Afterwards, a separate department checks whether they satisfy the reserve requirements. If they do and they have too many reserves, they will try to lend those reserves to other banks. If they don't, they will try to borrow reserves from other banks or from the central bank. Note that banks still cannot make loans willy-nilly. It's just that they're constrained by capital requirements instead, as opposed to what people commonly believe. Edit: If you are interested in the low-level workings of the system, I recommend reading the corresponding writeups of Modern Monetary Theory economists. A good starting point (though somewhat lengthy) is here: http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html http://neweconomicperspectives.org/p/modern-monetary-theory-...

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.
      - phyalow 13y ago
        MF Global...
AnIrishDuck 13y ago
You're right, in a way. But the main issue I'm still struggling with is credit and lending, which are core features of fractional reserve banking. And the more I think about it, the less the "fractional reserve" model makes sense when applied to bitcoin. If memory serves, this is how banking works today (beware, there are gross simplifications in here): 1. Customer A deposits $1 in Bank A 2. Customer B asks Bank A for $9 3. Bank A now needs to borrow $9. It can legally do this because it can prove to the government that its reserves ($1) are greater than 10% of its outstanding liabilities ($9). It first tries other banks, but if all else fails it can borrow from the Fed. 4. Bank A gives $9 to Customer B. I cannot see how step 3 happens in "bitcoin banking". The whole point is that there's no "central point of trust" and hence no lender of last resort. Or to restate, one of fractional reserve banking's key purposes is to influence the money supply. But this is clearly impossible under a "pure bitcoin" system, where the money supply is fixed by fiat.
- maxerickson 13y ago
  Step 3 doesn't have to happen for money supply expansion to take place. If the bank lends out $0.90 of the $1, people in the economy will be acting like $1.90 of money exists.
  - AnIrishDuck 13y ago
    Right, hence what I said (which is somewhat inaccurate) about a "100% reserve requirement". The bank could lend any amount up to its total deposits, but not above. This is very different than how banking works today. Banks (in the US) can lend up to 1000% of their current deposits. This is a core feature of the fractional reserve system, and is clearly impossible under a pure bitcoin alternative.
    - maxerickson 13y ago
      In practice, they don't. You can compare loans and leases with deposits here (around 75% right now...): http://www2.fdic.gov/SDI/SOB/ http://www2.fdic.gov/SDI/SOB/ I guess you are saying they do accounting shenanigans with the Federal Reserve to make the deposits larger than they really are? (I will admit, I am more interested in aggregate practice here than I am in what the more extreme banks are doing)

iambvk 13y ago

You are assuming deposits and loans both are done in terms of bitcoins. In theory, we can design a banking system that accepts deposits in bitcoins and gives out loans in the fiat currency.

AnIrishDuck 13y ago
Right, but you no longer have a "pure bitcoin" banking system. You have a dual currency system that is predicated on the trust of (1) the US government and (2) the bitcoin community. Also, such a system mutes a key feature of current "money multiplier" based systems, which is recursion. Under the current system, when you deposit $100 in a bank, that bank can then lend $10 to nine other people. Who can then each take that $10 and deposit it nine other banks, which can each lend $1 to nine other people... Without this effect, the money multiplier would probably need to be tweaked pretty drastically.

a8da6b0c91d 13y ago

> bitcoin doesn't seem suited to handle the economic needs of the modern world. There's a school of thought that the expansionary fractional reserve system we've had for the last 100+ years has worked OK because more and more fossil fuel energy was available over that time. It's possible we're in a new era where total energy usage will be essentially static, and the current monetary and banking system won't work. I'm not necessarily saying I buy the argument.

saryant 13y ago
I think the claim that future energy usage will remain static is largely flawed. For one, a few billion people are currently moving from an annual income of less than $10,000 to closer to $30,000. That's a huge, unprecedented global shift that will lead to a big increase in worldwide energy demand. Second, I think ingenuity will solve our future energy supply issues. A geologist once said "oil is found in the minds of men" and I think that claim holds true for all sources of energy. Look at shale gas: this is a huge energy source that wasn't even in anyone's radar thirty years ago. Moreover, effeciency increases over the next two decades, both in MPG standards, industry and electronics, could yield a savings equivalent to 13 million barrels of oil per day. That's like adding a new Norway and Russia to world energy supplies. Daniel Yergin's book The Quest coveres these future challenges quite well, I highly recommend it.

nhaehnle 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. Slightly tangential to the main topic, but this is a common misunderstanding and incorrect. Bank lending is not constrained by the amount of reserves a bank has, because banks can and do lend each other reserves (or sell each other reserves in exchange for other assets). So banks just make loans regardless of how many reserves they have. Afterwards, a separate department checks whether they satisfy the reserve requirements. If they do and they have too many reserves, they will try to lend those reserves to other banks. If they don't, they will try to borrow reserves from other banks or from the central bank. Note that banks still cannot make loans willy-nilly. It's just that they're constrained by capital requirements instead, as opposed to what people commonly believe. Edit: If you are interested in the low-level workings of the system, I recommend reading the corresponding writeups of Modern Monetary Theory economists. A good starting point (though somewhat lengthy) is here: http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html http://neweconomicperspectives.org/p/modern-monetary-theory-...