Quote from: kiko on June 06, 2013, 09:00:55 AM

Quote from: beeblebrox on June 06, 2013, 07:49:43 AM

Quote from: Razick on June 06, 2013, 06:41:44 AM

Quote from: Chet on June 06, 2013, 06:32:23 AM

Anything can be abused.
Fractional reserve doesn't seem possible with BTC, no way you could lend btc you didn't have. But it would be possible to create a system that lent $ (or some other fiat) based on holdings of BTC. I don't see why anyone would, but thats a different question.

Fractional reserve banking doesn't allow lending money that doesn't exist, it just permits lending money that you don't personally have even though someone else does.

It is possible to do fractional reserve banking with bitcoin. Fractional reserve banking does allow to you to lend money that doesn't exist-- indeed that is exactly what banking is all about. The banks lending more money than they have on deposit is how money is created!

The fact that the bitcoin supply is limited to 21,000,000 doesn't stop the banks for lending out more than that-- if all these bitcoin were deposited in bitcoin banks then using the current reserve of about 10% of traditional fiat banking the banks would lend out 210,000,000. What the banks are really dealing with is not bitcoins but rather promises made about the bitcoins: that's why they can create more-- a promise is a very easy thing to create while a bitcoin is not so easy.

To clear things up semantically, Fractional reserve banking is the process of assigning multiple owners to the same coin on deposit, then hoping that a threshold number of depositors do not attempt to withdraw simultaneously. The law of large numbers makes this process very reliable (and profitable). However with bitcoin, it would be difficult initially to get to the safety of that large number (of deposits). You can do FRL with anything, the inability to print bitcoins is tangential and will only affect (raise) the cost of deposit insurance for the bank.

I think fractional reserve banking is widely misunderstood. I agree that many people think this means lending out currency banks don't have, thus creating currency out of thin air. However, I have never seen any proof! that this is the case. The definition of fractional reserve banking as defined by wikipedia is correct in my opinion. It means keeping a fraction of the deposits in reserve and not lend it out. Meaning all money lend out is indeed covered by a deposit. In fact the bank always has more on deposit than it has lend out. The lie is simply that all depositors think they can withdraw their money at anytime but in reality only say 5% can as all other money is locked in short and long term loans. This lie can simply be removed by only offering time deposits that are locked for some time, the same time as the corresponding loan is locked.

Theoretically this means bitcoins can perfectly be used to lend out just like gold is being lend out today (housing market Thailand). The problem with bitcoin is that it will go up in purchasing power over time, in contrast to gold that only preserves it over time, making borrowing bitcoin a very bad deal. Borrowers will default much quicker on a bitcoin loan than a fiat loan. Hence why I think that bitcoin lending will remain small at best and will only take traction after bitcoin has become a mainstream currency and the value only goes up by 2% per year on average. Long way off...

I think assigning multiple owners to the same coin on deposit is not fractional reserve banking in my opinion but fraud even by today's banking regulations. A fraud that indeed can be executed by banks since their origin. A fraud that indeed creates currency out of thin air (currency being credit here), however even this fraud does NOT create money out of thin air as the bank did not create any extra dollars in existence by lying to some customers, it just created extra credit (promise of payment) that will never actually be executed as it is physically impossible for the bank to do so since commercial banks do not have printing machines.

What we see here is again the trick to blame the free market for government corruption. There is only one bank that can and does create money out of thin air and that is the central bank. An institution that is not a bank at all but owns printing machines and is 'a lender of last resort' that has the exclusive rights to create money out of thin air, an exclusive right granted by the government. At the start they did it just like corrupt bankers did, creating more credit (paper promises of payment = fiat) than they are good for (gold in the bank). Being the government they took it one step further then corrupt bankers could do, and simply cancelled all promises of payment in gold (1972) which would normally make the promises (fiat paper) become worthless immediately but that didn't happen because indeed, as bitcoin proves again, money does not need to be backed by a commodity in order to preserve it's value. Ofcourse fiat paper not being sound money governments continued to print more of it, destroying the value slowly but steadily. And who to blame with false accusations? Bankers...

I think bitcoin banks will not be in the business of lending out bitcoins but will be focused on safekeeping of bitcoins, as well as insuring of them against theft and natural disasters. A very important service. But it will cost money. And many will choose free solutions for bitcoin storage offering no insurance, like blockchain wallet. Yes, the world will look very different. I think the banking world will mostly disappear together with the currency system it became big on. Borrow first, pay back later with devalued money, will be replaced with earn first or have nothing. Sound money brings sound habits and sound institutions. Bitcoin to the sky!