5 ms·

Fractional reserve banking can be done with bitcoin just as with any underlying "base asset" such as gold or Federal Reserve Banknotes. It just means that the

by roblev 11y ago

Fractional reserve banking can be done with bitcoin just as with any underlying "base asset" such as gold or Federal Reserve Banknotes. It just means that the banks can lend most of the asset, and must keep back a fraction for liquidity purposes (in case a depositor wants some of their asset back). In many ways Fractional Reserve Banking would be much more risky with bitcoin than with banknotes; with banknotes at least there is a lender-of-last-resort central bank. The central bank can create additional money at will to lend to a bank that is in a liquidity crisis, to see it through the crisis. With bitcoin, there is no such operator. Now if nobody ever lends or borrows bitcoin, then there will be no issue - but lending and borrowing has been quite central to commerce over the last couple of centuries, with mostly decent effects. Personally I'm not sure bitcoin economics are that well thought out!

Frozenlock 11y ago
You are conflating lending and fractional reserve. It's possible to have lenders and borrowers without operating a fractional reserve.
- roblev 11y ago
  Well as I see it there are only really two possibilities: full reserve or fractional reserve, and I've never really seen full reserve banking (i.e. demand deposits cannot be lent). But please explain if you mean something else.
  - Frozenlock 11y ago
    I don't. With a full reserve, demand deposits shouldn't be lent, but term deposits can be. With this, you maintain a full reserve and continue to have lenders/borrowers.
    - dragonwriter 11y ago
      Lending term deposits cannot provide a guarantee of full reserve, because term deposits mature and you cannot absolutely guarantee that you will have reserves on hand to meet them when they mature. You can have "full reserve" of demand (including matured term) deposits as a goal and lend out term deposits, but you get at best a statistical probability approaching -- but never equaling -- unity of maintaining full reserve based on past repayment and new deposit patterns.
      - Frozenlock 11y ago
        And? Demand deposits are still 100% whole.
wongarsu 11y ago
Sure fractional reserve banking can be done with bitcoin. It's not a problem of the currency but of the environment and ecosystem. A regular bank is well-trusted and insured. A bank run is unlikely because of the trust and even in that case the insurance or a lender can keep the bank solvent. A bitcoin bank is at best moderately trusted and is almost always uninsured. Minor events can lead to panic which leads to a bank run, which leads to insolvency because there is neither insurance nor a good lending infrastructure available to most bitcoin banks. Concerning lending: there is a small but growing bitcoin lending community, but it's closer to Kickstarter or the VC model. Credits are not given out by banks but by a number of small investors. It's not very efficient yet, but it kind of works.
- roblev 11y ago
  Yes I agree, and personally I would trust a bitcoin bank even less given the repeated security problems that bitcoin businesses to date.
mikekchar 11y ago
To be honest, I don't see how you could possibly do fractional reserve with Bitcoin. By definition fractional reserve is lending more currency than you have. Banks can do this because they are allowed to create the money that they lend. So if I am allowed a 10:1 ratio of lending and reserve, as long as I maintain $1 in my reserve, I'm allowed to lend $10. Those $10 are poofed into existence when the loan is created, though. As another person mentioned, I think you are confusing lending with reserve banking. A bank (or any entity) is allowed to lend as much money as they want to someone if they are actually lending money that they have. That's not fractional reserve. Fractional reserve creates money. The fraction limits how much money you are allowed to create. You can't do that with Bitcoin by design. Of course, you can lend money (that you have) with Bitcoin. There is currently no automated way to record that the transaction was a loan as opposed to a payment, but that's true of all currencies. In fact Bitcoin had some plans to implement contracts in the protocol, but I don't think anyone has done it yet. If I am to opine slightly, I think that Bitcoin's lack of ability to do fractional reserve is probably a mistake. I think it relegates it to a payment method as opposed to a viable currency. The problem with Bitcoin as a currency is the lack of availability. Although it often doesn't look like it, I think the purpose of a currency is to get resources into the hands of people who need resources, but don't have it. With Bitcoin, the currency is a limited resource and those that have it have no particular reason to spread it around. With a more traditional currency, the money supply can grow to match demand. The banks which create the currency have an incentive to loan money because the money that they are loaning is springing into existence at that time -- they aren't loaning their own money. The only thing the banks need to worry about is that on average, the growth produced by the loan is greater than the interest charged. Having a fluid money supply like this allows people who do not have money to get it and reduces inefficiencies (i.e. people being idle because they don't have the resources to produce something). Having said all that, I have no idea how you could implement fractional reserve in a distributed system and have any protection for horrible abuses. Until that problem is solved, I can't really see a way for this kind of currency to act as a true currency (as opposed to a payment method). If I remember correctly, there was a review of Bitcoin by a prominent economist a few years ago that pointed out this problem.
- saalweachter 11y ago

by roblev 11y ago

Frozenlock 11y ago

You are conflating lending and fractional reserve. It's possible to have lenders and borrowers without operating a fractional reserve.

roblev 11y ago
Well as I see it there are only really two possibilities: full reserve or fractional reserve, and I've never really seen full reserve banking (i.e. demand deposits cannot be lent). But please explain if you mean something else.
- Frozenlock 11y ago
  I don't. With a full reserve, demand deposits shouldn't be lent, but term deposits can be. With this, you maintain a full reserve and continue to have lenders/borrowers.
  - dragonwriter 11y ago
    Lending term deposits cannot provide a guarantee of full reserve, because term deposits mature and you cannot absolutely guarantee that you will have reserves on hand to meet them when they mature. You can have "full reserve" of demand (including matured term) deposits as a goal and lend out term deposits, but you get at best a statistical probability approaching -- but never equaling -- unity of maintaining full reserve based on past repayment and new deposit patterns.
    - Frozenlock 11y ago
      And? Demand deposits are still 100% whole.

wongarsu 11y ago

Sure fractional reserve banking can be done with bitcoin. It's not a problem of the currency but of the environment and ecosystem. A regular bank is well-trusted and insured. A bank run is unlikely because of the trust and even in that case the insurance or a lender can keep the bank solvent. A bitcoin bank is at best moderately trusted and is almost always uninsured. Minor events can lead to panic which leads to a bank run, which leads to insolvency because there is neither insurance nor a good lending infrastructure available to most bitcoin banks. Concerning lending: there is a small but growing bitcoin lending community, but it's closer to Kickstarter or the VC model. Credits are not given out by banks but by a number of small investors. It's not very efficient yet, but it kind of works.

roblev 11y ago
Yes I agree, and personally I would trust a bitcoin bank even less given the repeated security problems that bitcoin businesses to date.

mikekchar 11y ago

To be honest, I don't see how you could possibly do fractional reserve with Bitcoin. By definition fractional reserve is lending more currency than you have. Banks can do this because they are allowed to create the money that they lend. So if I am allowed a 10:1 ratio of lending and reserve, as long as I maintain $1 in my reserve, I'm allowed to lend $10. Those $10 are poofed into existence when the loan is created, though. As another person mentioned, I think you are confusing lending with reserve banking. A bank (or any entity) is allowed to lend as much money as they want to someone if they are actually lending money that they have. That's not fractional reserve. Fractional reserve creates money. The fraction limits how much money you are allowed to create. You can't do that with Bitcoin by design. Of course, you can lend money (that you have) with Bitcoin. There is currently no automated way to record that the transaction was a loan as opposed to a payment, but that's true of all currencies. In fact Bitcoin had some plans to implement contracts in the protocol, but I don't think anyone has done it yet. If I am to opine slightly, I think that Bitcoin's lack of ability to do fractional reserve is probably a mistake. I think it relegates it to a payment method as opposed to a viable currency. The problem with Bitcoin as a currency is the lack of availability. Although it often doesn't look like it, I think the purpose of a currency is to get resources into the hands of people who need resources, but don't have it. With Bitcoin, the currency is a limited resource and those that have it have no particular reason to spread it around. With a more traditional currency, the money supply can grow to match demand. The banks which create the currency have an incentive to loan money because the money that they are loaning is springing into existence at that time -- they aren't loaning their own money. The only thing the banks need to worry about is that on average, the growth produced by the loan is greater than the interest charged. Having a fluid money supply like this allows people who do not have money to get it and reduces inefficiencies (i.e. people being idle because they don't have the resources to produce something). Having said all that, I have no idea how you could implement fractional reserve in a distributed system and have any protection for horrible abuses. Until that problem is solved, I can't really see a way for this kind of currency to act as a true currency (as opposed to a payment method). If I remember correctly, there was a review of Bitcoin by a prominent economist a few years ago that pointed out this problem.

saalweachter 11y ago