7 ms·

> One theory is that Mt. Gox became fractional reserve some time in the past, either by losing bitcoins or by spending them. Maybe pedantic, but many people ha

• smacktoward 13y ago
  Or, put alternately, it taints actual fractional reserve banking (which has worked pretty well for hundreds of years) with a sense of being the same kind of shady business practice as this. (Which may be the point of the comparison, given the ideological bent of many Bitcoin advocates.)
  • danmaz74 13y ago
    AFAIK, fractional reserve is the bete noir for many believers in bitcoin.
    • jpmattia 13y ago
      > AFAIK, fractional reserve is the bete noir for many believers in bitcoin. Then they're hosed, because as soon as somebody somewhere makes a loan using bitcoin, then bitcoin becomes a fractional reserve currency. Edit: It seems that some cryptocurrency folks have confused "fractional reserve" with "fiat". Those are two very different monetary concepts.
      • testacular 13y ago
        And it's worth remembering that banks aren't the only institutions that make loans. There are a lot of businesses that extend credit (post-paid services, invoicing with net 60 terms, etc), which has the same exact macroeconomic effect.
      • praxeologist 13y ago
        >as soon as somebody somewhere makes a loan using bitcoin, then bitcoin becomes a fractional reserve currency. No, there is the other option called full reserve banking.
        • chii 13y ago
          i don't get how you can loan bitcoins in any other way other than full reserve - unless you somehow put trust into the bank (which you have to for fiat money, but for bitcoins, you can verify and so don't have to trust credit/notes offered by the lender).
          • jpmattia 13y ago
            Because somebody will get the idea to offer of interest on bitcoins in exchange for lending their coins. And somebody will take that bet. It's not like cryptocurrencies can change human nature.
            • chii 13y ago
              interest bearing loan has nothing to do with the "reserve" you need. if i borrowed 1 bitcoin from you, and then i default, then how are you going to pay back that bitcoin to whoever deposited it?
              • ohashi 13y ago
                From the profits earned off of other borrowers. Like banks do.
              • 13y ago
    • yuubi 13y ago
      Probably only the sort of fractional-reserve banking in which the banker lends out for a year or 30 deposits accepted under the promise to return them upon demand. That's the sort that can have bank runs. If depositors agree that their money is locked up for a while, no problem.
  • dredmorbius 13y ago
    put alternately, it taints actual fractional reserve banking Hardly: it simply reveals the speakers utter ignorance on the subject. FRB has its challenges (which deposit insurance and central banking are largely meant to address). What Mt. Gox was doing was in no way at all FRB.
• genwin 13y ago
  In which case the banks can simply have the gov't force future taxpayers to make them solvent again. Perhaps bitcoin will one day attain "too big to fail" as well.
• logfromblammo 13y ago
  Reserves are the cash on hand available to pay people able to demand it. Since in practice, except during a run, only a fraction of a bank's liabilities are called in at any given time, it is safe to keep less cash on hand than the entire amount that could be withdrawn instantly. The rest is converted to assets with equivalent value that have worse than instant liquidity, but a higher return on investment. This keeps the balance sheet honest with respect to the total value of assets and liabilities, but technically, the bank cannot honor all of its commitments in the worst case scenario. That's fractional reserve. Mt. Gox does not even have the imaginary, illiquid assets to balance out its depositor liabilities. That makes it bankrupt, not fractional reserve.
  • dragonwriter 13y ago
    > Mt. Gox does not even have the imaginary, illiquid assets to balance out its depositor liabilities. That makes it bankrupt, not fractional reserve. Strictly speaking, it makes them insolvent. The fact that they are insolvent is the reason they have sought the protection offered by bankruptcy, but the two states are distinct.
    • logfromblammo 13y ago
      While the terms are easily distinguishable to a lawyer, to others, they are practically synonymous, with insolvency nuanced towards being a temporary condition and bankruptcy nudged towards a more permanent or intractable failure. The implication is that an insolvent person could become solvent by immediate application of better financial management, but a bankrupt person has no choice but to default on a portion of his debts or other financial obligations. Bankruptcy is the noun/adjective descibing what the court does with bankrupt people and businesses. The ACME brand hair-splitter is the only professional-grade capillascindor you will ever need.
• lawnchair_larry 13y ago
  Huh? This isn't true. Banks loan without collateral all the time, such as via credit cards or unsecured lines of credit. This is why fractional reserve banking increases the money supply. Banks are allowed to literally invent money out of thin air, so long as their invented money is within the multiple required by law for cash they have on hand. Mt. Gox was doing (attempting) the same thing our traditional banks do in that sense. They were increasing the bitcoin supply using an analogous scheme. (Note: I'm not defending Mt. Gox here)
  • dllthomas 13y ago
    "Banks loan without collateral all the time, such as via credit cards or unsecured lines of credit." It's true that there's no collateral, but there is a corresponding asset - the loan itself. "This is why fractional reserve banking increases the money supply." Fractional reserve banking would increase the money supply even if banks restricted themselves to fully secured lending. Bank deposit accounts act a lot more like money than does a mortgage.
    • chii 13y ago
      i want to imagine uncollateralized load like this: i'm a bank with 0 dollars in any asset, but 0 debt obligations. So my networth is 0 right now. You come along to borrow off me $100. Now i have an asset of $100(the debt which you have to pay back + interest), but as soon as you spend your money, i also have a debt of $100. Now isn't this a good way to make money from nothing?
      • dllthomas 13y ago
        If I have zero dollars, how did I have anything to loan you? I can put numbers on my ledger, but you won't be able to withdraw it - that's not fractional reserve, that's zero-reserve. On the other hand, I've never objected to the notion that fractional reserve creates money - in fact, my comment above explicitly states it.
  • jpmattia 13y ago
    > Banks loan without collateral all the time, such as via credit cards or unsecured lines of credit. Yes, I was avoiding that can of worms. Banks do unsecured lending, there is still an asset entry to offset it so that the books remain positive. Armies of regulators and accountants and volumes of laws in effect here. But the salient point: A fractional reserve business consciously makes loans with an expectation of being paid back. To my knowledge, Gox was not trying run a fractional reserve business, and the term is being misapplied. > This is why fractional reserve banking increases the money supply. It increases a money supply, not the money supply. It does not increase M0 (and there was a time that banks were allowed to do just that.)
• dllthomas 13y ago
  "making many banks technically insolvent" My understanding is that few banks were actually made insolvent, but that lots had to eat fire-sale prices due to liquidity issues. Your sketch isn't wrong, though.
  • jpmattia 13y ago
    > My understanding is that few banks were actually made insolvent This was another can of worms. Mark-to-Market accounting was rescinded, partly to address this issue (http://online.wsj.com/news/articles/SB123867739560682309 http://online.wsj.com/news/articles/SB123867739560682309) but many folks thought the banks were dragging their feet on re-marking their housing assets well before that. So were they insolvent because nobody put an accurate, timely value? Those that anticipated the situation by shorting the banks made some serious money (and then made less when the SEC banned shorting.)
    • dllthomas 13y ago
      Yeah, like I said, your sketch was basically right.
• apalmer 13y ago
  This a great point, at no point did Mt. Gox act as a fractional reserve. It at some point misplaced funds and then tried to cover up this fact. Complete abuse of the term 'fractional reserve'.
  • deleted 13y ago
    [deleted]
• dragonwriter 13y ago
  > Maybe pedantic, but many people have been using fractional reserve wrt Mt Gox lately. The usual meaning of that term: A bank will loan out deposits, reserving a fraction for withdrawals. However, a key point is that the bank holds collateral against the loan, and that collateral has a fair-market value, so the balance sheet is still positive. No, the balance sheet is still positive because the debt owed to the bank is an asset of the bank. This is independent of whether the debt is secured by collateral. (Of course, even a risky loan that is unsecured by collateral is a very different thing than simply having deposits stolen, so, there is a good point that while Mt.Gox surely had less-than-full reserves, it was doing something very different than fractional reserve banking, even assuming that Mt. Gox's own explanations are correct.)
  • jpmattia 13y ago
    > No, the balance sheet is still positive because the debt owed to the bank is an asset of the bank. This is independent of whether the debt is secured by collateral. Not always true. For non-recourse loans, the value never exceeds the collateral. When the collateral gets written down, so does the asset.
• joe_the_user 13y ago
  Hmm, I recall spinning this theory on another hn thread [1]. And sure, you are correct that Mt Gox didn't make loans, didn't act exactly in all respects like bank. But the literal term "fractional reserve" is certainly suggestive of what both a standard modern bank does and what a crocked bitcoin exchange could do - only keep a small amount of money to satisfy inflows and outflows while doing something else with the rest of the money entrusted with it. If Mt. Gox did this, they clearly weren't responsible in doing it since don't have the money entrusted to them. But it pretty much seems like this lack of responsibility would be what distinguishes a failed bitcoin exchange from an ordinary banks. Consider, Wikipedia says: "Fractional-reserve banking is the practice whereby a bank retains reserves in an amount equal to only a portion of the amount of its customers' deposits to satisfy potential demands for withdrawals. Reserves are held at the bank as currency, or as deposits reflected in the bank's accounts at the central bank. The remainder of customer-deposited funds is used to fund investments or loans that the bank makes to other customers." [2] Which is to say, a fractional reserve system involves keeping only some money handy and hoping that the money you remove for other purposes goes on to make more money. Now, if you don't tell people you're doing this, then yes it's fraud. Secretly operating something that people don't think of as a bank, as a bank, is fraud. Lose the money you've invested and a fractional system collapses, whether you are openly operating as a bank or secretly operating as a bank. Secret banks do tend to collapse more often just 'cause they're shady. But the secret banks that make money, well you don't hear about them most of the time. [1] https://news.ycombinator.com/item?id=7343986 https://news.ycombinator.com/item?id=7343986 [2] http://en.wikipedia.org/wiki/Fractional_reserve_banking http://en.wikipedia.org/wiki/Fractional_reserve_banking
• dredmorbius 13y ago
  Thanks for this, you've just put your finger on something that's been bugging me about a lot of the recent Mt. Gox / Bitcointgasm discussion. Actually, it raises the point further that if so many people who claim to know what they're talking about can confuse Mt. Gox's position (fraud, incompetence, insolvency, bankruptcy) with fractional reserve lending, it makes me strongly question just who the hell actually knows what they're talking about.