I think everyone is missing my point.  Yes, if the economy operates on bitcoin transactions, banks are screwed, etc.  However, consider the following example:

1) I deposit BTC1000 in a bank.  They offer me 2%/yr interest.  They also issue me a checkbook and a debit card.

2) The bank immediately loans out BTC900 of my BTC1000.  My balance "stays" at BTC1000.  This is the creation of BTC900 new.  No new bitcoins were really created - that would require the use of computing power.  Rather, the bank is merely lying to me, telling me that the BTC1000 are mine, and telling someone else that BTC900 of those same bitcoins are theirs.  Thus, although no new bitcoins have actually been created, as far as the economy is concerned there are now BTC1900 in circulation, where before there were only BTC1000.  Inflation.  This, and not by the printing presses, is how dollar, pound, euro, yen, and rupee inflation occur too - merely by bank lies, not by the printing of bills.

3) Assume there are thousands of other people who have deposits on the bank, each with checkbooks and debit cards.  This works equally well if you want thousands of people with deposits in *any* bank, as the banking system as a whole simulates a single, enormous, monolithic bank.

4)Now, if a bunch of people want to go and withdraw their BTC to make purchases, then yes, the banks are screwed, because they have lied, and say that there are more BTC on deposit than there actually are.  However, using BTC to make purchases is *so difficult!*  You have to know an *address,* and run a *client,* and have an *internet connection....*  (A bit of sarcasm there...)....so people decide they're just going to use their debit cards instead. 

5) So, "Bob" buys BTC35 worth of groceries from "FoodMart."  The bank executes "BobAccount-BobAccount-35; FoodMartAccount=FoodMartAccount+35;"  No bitcoins actually change hands.  If Bob and FoodMart use different banks, then maybe some actual coins change hands, but only the difference between the number in the day that flowed from Bank A to Bank B, minus those that flowed from Bank B to Bank A, not the full amount.

6)Thus, as long as a decent percentage of the populace uses bank accounts of any kind, then the fractional reserve, inflationary system remains in place.  This is because although your money is *denominated* in bitcoins, the real money is bank account balances, which have none of the restrictions which bitcoins have.

The one saving grace which I can see is that if it were public knowledge precisely how many bitcoins exist, then people wouldn't be fooled by the bank balances - they would look at their balance and go "There's no way I have that percentage of the bitcoins in the world."  But this is assuming no governmental or business interests interfere with this, and its pretty optimistic about the logical reasoning skills of people in general.

A few responses to the earlier points...


You can be your own bank now - you can bury cash in your back yard or keep your entire net worth in dollar bills in a safe in your house.  Banks, however, offer something to entice the users to trust them.  If they offered interest in Bitcoins, people would trust them, just as they trust them when they offer interest in dollars.


No, this is no different from the current system.  If you want to store your money, you put your wallet in a safe in your house.  This is clearly distinguishable from giving the control of your money to an investment bank which lends them for interest.  In the bitcoin bank system, you deposit BTC1000, the bank lends out BTC900, but when you ask the bank, they still tell you BTC1000 is in your account, and so the money supply is inflated.


Really?  They can "print" money by moving fake balances into their accounts.  This is impossible for now, as doing so would probably make the number of BTC in circulation exceed 21M.  However, in a while, when natural deflation sets in, and a loaf of bread is .000001BTC, there's plenty of room for banks to fictitiously expand back up to the 21M limit.

Yes, but you're mistaking "print" currency on a printing press for "create" money in accounts.  Banks could still do this with bitcoins.  They wouldn't create real bitcoins, but it would certainly seem real to the population, inflating the currency.



There is no way at all that we can project what banking under bitcoins might look like.  That would depend on A) what is legal in a particular location, and B) What people can get away with.  The bitcoin itself does not control, or influence in any way, the nature of banking.


Banks don't store wallets, just as banks don't store dollar bills now.  They keep a cache or currency on hand based upon what they expect to need, and the rest is lent out.  It would work identically with bitcoins - what people care about is their "balance" - how much the bank *tells* them they have, regardless of how much is there.  This difference between reserve_cash and total_balances_sum is the inflation.  Banks lie to people about how many dollars they have, and they would lie identically about bitcoins, and people would remain ignorant, perhaps willfully, thanks to the promise of interest.  Transactions, by and large, are made on bank balances now, not on dollars, and would be made on bank balances then, not on bitcoins.

That's not true.  If a bank does a statistical analysis of the number of bitcoins needed in a day/week/month, etc, and can predict the number with very high accuracy, then if they keep that many coins on hand, they can satisfy depositors.  This has kept the banks in place since the middle ages - the ONLY time it failed was in the Great Depression.  The current crises is due to overextension, yes, but not so much that it created a shortage of cash.  Keep in mind that banks keep on hand enough money  such that they can satisfy all of your requests, and all of your neighbors, and all of the requests of, say, a thousand people.  They may have a million customers, though, which means they've lent out 99% of their money.  Unless, though, they get 1,001 customers in a day, they're completely safe - and they may know they won't get that many customers simply because there isn't enough time in business hours to process them all.


Yes, sadly, bitcoins can be created out of thin air.  More accurately, the perception of bitcoins can be created out of thin air.  People don't care how many dollars are in their wallet.  They care how many dollars are in their wallet, plus how many dollars the bank *tells* them are in their checking account.  If they buy things using the checking account, and the money goes to another account, then no money is even needed!  Simply, bank A subtracts a number from an acocunt, and bank B adds it in.  Similarly, you could tell people they had BTC1000, and if they never want *all* those BTC1000 in coin form, then they never know you don't have them.  You create the coins out of thin air by lying about the balance, not by minting them.  And, of course, you give interest, which tells Joe Schmoe "Leave your money in the bank.  Don't take it all out, because then you make less money!"  This works...it creates dollars out of thin air without a printing press, and it would create bitcoins out of thin air without the crypto algorithm.


Nope, you could use remote checking by just using your bank balance.  Not bitcoins need be involved.  People just need to believe that bitcoins are involved.  The only time you need bitcoins is if someone makes a withdraw to cash, not a withdraw to any other account.


The central mistake in all of this is that people are assuming that if the money is expressed in bitcoins, then bitcoins are being used.  However, bank balances, not dollars, are used for most transactions today, making it possible for the banks to lie and essentially print money.  I welcome further forum debate on the issue.  For a humorous explanation of how banks, not governments with printing presses, print money today, just as they would create money with bitcoins, see the two online films "Money as Debt" and "Money as Debt 2: Promises Unleashed."  They're not entirely accurate, and they drastically oversimplify the issue, but they dispel the common myth that governments, not banks, create money supply.