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I'm a fan of bitcoin in many ways, but this is fanboy fiction with no understanding of money. > Fractional reserve banking entails the creation of new money th

I'm a fan of bitcoin in many ways, but this is fanboy fiction with no understanding of money. > Fractional reserve banking entails the creation of new money that is fungible with already preexisting money, i.e. it can be used interchangeably within the currency’s payment systems. This is impossible with Bitcoin. Not true. Currency can easily be issued against bitcoin. When USD was backed by gold, there was plenty of fractional reserve banking and no-one could issue more gold. In fact, there is already debt-based money backed by BTC issued on the Ripple network. EDIT: I should add, that fractional reserve banking does not mean infinite money supply. Depending on the amount of reserves required (by customers, government, etc.), as long is it's greater than 0%, there is a limit on the supply. E.g. if the reserve is 20%, only 80 BTC can be loaned against 100, and only 64 against wherever the 80 is deposited, and on-and-on until it approaches 0. Fractional reserve is not necessarily a bad method to allow for risk assessed expansion and contraction of money supply. > ...blah blah... make it certain that ... Bitcoin will be adopted as the global currency Oh really? It's certain that the globe will adopt a currency because of it's asymptotic money supply and proof of work algorithm? That makes no sense at all. The world will adopt bitcoin because it's an efficient means of exchange and safe as a value store / investment from dilution by central banks. Also, the "security" row in the currency comparison chart is misguided. Bitcoin is far less secure than bank maintained fiat currency networks, because in the latter, fraudulent transactions and electronic theft are generally reversible.

VienneseCPA 13y ago
Would you please write an article about Bitcoin monetary policy with your understanding of money?
dnautics 13y ago
I'm a fan of bitcoin, as well, and I totally agree with you on their #3 (Fractional reserve banking). I was going to come here with exactly the same statement about gold. There is, however, a key difference in that unlike contemporary FRB, any FRB with bitcoin will necessarily have all of the inflationary effects of monetary expansion through debt exactly counteracted by deflationary effects of debt amortization and bankruptcies.
- fragsworth 13y ago
  There's a major difference. With Fiat, you're basically forced to use a bank, because that's the safest way to hold your cash. Every bank, however, is participating in fractional reserve lending, so you're also forced to take part - and the government is forced to insure everyone from potential losses. Fractional reserve banking can happen with Bitcoin, but as a user, you do not have to participate. You can hold your coins in your own wallet and not have to worry about what your bank is doing with it. This means you can never lose your coins from a run on the bank. Now, if you want to, you can loan your coins out with interest. Or you can give them to a bank and collect an interest rate. But when you do this, you're taking a risk, and you should assume any losses from this risk on your own, and nobody needs to be insured for it. If you don't want to lose your coins, keep them in your own wallet.
  - dnautics 13y ago
    Well, you don't have to participate in bitcoin as a whole, but if do participate in bitcoin, even if you don't participate in any fractional reserve schemes on top of bitcoin, you will still be affected by the monetary expansion caused by them.
  - deleted 13y ago
    [deleted]
  - crystaln 13y ago
    I think you're off on both points. You do not have to use a bank account for USD - you can use safety deposit boxes or other secure locations. This is analogous to how you would store large amounts of bitcoin privately. I think the incentive to use a bank for BTC will ultimately be greater than for USD, since the risk of theft is less predictable or manageable by the average consumer. Holding a large bitcoin balance is terrifying - any keylogger or other compromise could result in complete loss. With physical USD, at least you know intuitively how to protect it.
eof 13y ago
You've actually got it wrong. Debt-based "ripple" bitcoin (or any other similar system) is not fully interchangeable; you can use BTC IOUs within ripple and pass them around, but you cannot send an IOU across the bitcoin network. This is different than with fractional reserve; where 'created' money can be withdrawn, spent, and intermingled without any differentiation.. I can spend a fractionally-reserve created dollar at walgreens as easily as a bona-fide fed printed dollar bill. You cannot send a Ripple BTC to my bitcoin-qt wallet, nor will bitpay/coinbase/blockchain or any other blockchain-audited wallet accept a btc-iou. edit: i basically agree with your other point that the the stated reasons in OP are not the reasons bitcoin will likely undergo s-curve adoption
- wmf 13y ago
  Unless blockchain transaction fees become so high that BTC-denominated IOUs become the standard.
- crystaln 13y ago
  You're right that BTC IOUs on Ripple are not fully interchangeable with BTC. However, neither was gold interchangeable with USD, yet each gold note was redeemable for gold. This did in may ways restrict the level of fractional reserve banking, and certainly the direct issuance of money. (Many suspect that the US did not have nearly enough gold to redeem all its currency, and that this was a primary motivation for leaving the gold standard.) The process of redemption of BTC IOUs for actual BTCs on the Ripple network resembles the process of redemption of gold-backed USD for gold. Similar to gold being transmitted over a different network than gold-backed USD (the former being physical,) BTC backed notes would be transmitted over a different network - something like Ripple. Fractional reserve banking can also be practiced directly with BTC, simply by lending against deposits. (explained here: http://www.cnbc.com/id/101048897 http://www.cnbc.com/id/101048897)
  - dnautics 13y ago
    "Many suspect that the US did not have nearly enough gold..." That's an understatement! It was the national policy of an entire country i.e. France (well I guess not all their citizens directly practiced this suspicion) to withdraw its gold reserves in the US for precisely this reason, until nixon closed the window in 1970.
jacques_chester 13y ago
I think that Bitcoin is ultimately less secure because it has two single points of failure: the design and the implementation.

VienneseCPA 13y ago

Would you please write an article about Bitcoin monetary policy with your understanding of money?

dnautics 13y ago

I'm a fan of bitcoin, as well, and I totally agree with you on their #3 (Fractional reserve banking). I was going to come here with exactly the same statement about gold. There is, however, a key difference in that unlike contemporary FRB, any FRB with bitcoin will necessarily have all of the inflationary effects of monetary expansion through debt exactly counteracted by deflationary effects of debt amortization and bankruptcies.

fragsworth 13y ago
There's a major difference. With Fiat, you're basically forced to use a bank, because that's the safest way to hold your cash. Every bank, however, is participating in fractional reserve lending, so you're also forced to take part - and the government is forced to insure everyone from potential losses. Fractional reserve banking can happen with Bitcoin, but as a user, you do not have to participate. You can hold your coins in your own wallet and not have to worry about what your bank is doing with it. This means you can never lose your coins from a run on the bank. Now, if you want to, you can loan your coins out with interest. Or you can give them to a bank and collect an interest rate. But when you do this, you're taking a risk, and you should assume any losses from this risk on your own, and nobody needs to be insured for it. If you don't want to lose your coins, keep them in your own wallet.
- dnautics 13y ago
  Well, you don't have to participate in bitcoin as a whole, but if do participate in bitcoin, even if you don't participate in any fractional reserve schemes on top of bitcoin, you will still be affected by the monetary expansion caused by them.
- deleted 13y ago
  [deleted]
- crystaln 13y ago
  I think you're off on both points. You do not have to use a bank account for USD - you can use safety deposit boxes or other secure locations. This is analogous to how you would store large amounts of bitcoin privately. I think the incentive to use a bank for BTC will ultimately be greater than for USD, since the risk of theft is less predictable or manageable by the average consumer. Holding a large bitcoin balance is terrifying - any keylogger or other compromise could result in complete loss. With physical USD, at least you know intuitively how to protect it.

eof 13y ago

You've actually got it wrong. Debt-based "ripple" bitcoin (or any other similar system) is not fully interchangeable; you can use BTC IOUs within ripple and pass them around, but you cannot send an IOU across the bitcoin network. This is different than with fractional reserve; where 'created' money can be withdrawn, spent, and intermingled without any differentiation.. I can spend a fractionally-reserve created dollar at walgreens as easily as a bona-fide fed printed dollar bill. You cannot send a Ripple BTC to my bitcoin-qt wallet, nor will bitpay/coinbase/blockchain or any other blockchain-audited wallet accept a btc-iou. edit: i basically agree with your other point that the the stated reasons in OP are not the reasons bitcoin will likely undergo s-curve adoption

wmf 13y ago
Unless blockchain transaction fees become so high that BTC-denominated IOUs become the standard.
crystaln 13y ago
You're right that BTC IOUs on Ripple are not fully interchangeable with BTC. However, neither was gold interchangeable with USD, yet each gold note was redeemable for gold. This did in may ways restrict the level of fractional reserve banking, and certainly the direct issuance of money. (Many suspect that the US did not have nearly enough gold to redeem all its currency, and that this was a primary motivation for leaving the gold standard.) The process of redemption of BTC IOUs for actual BTCs on the Ripple network resembles the process of redemption of gold-backed USD for gold. Similar to gold being transmitted over a different network than gold-backed USD (the former being physical,) BTC backed notes would be transmitted over a different network - something like Ripple. Fractional reserve banking can also be practiced directly with BTC, simply by lending against deposits. (explained here: http://www.cnbc.com/id/101048897 http://www.cnbc.com/id/101048897)
- dnautics 13y ago
  "Many suspect that the US did not have nearly enough gold..." That's an understatement! It was the national policy of an entire country i.e. France (well I guess not all their citizens directly practiced this suspicion) to withdraw its gold reserves in the US for precisely this reason, until nixon closed the window in 1970.

jacques_chester 13y ago

I think that Bitcoin is ultimately less secure because it has two single points of failure: the design and the implementation.