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.
1) I deposit BTC1000 in a bank. They offer me 2%/yr interest. They also issue me a checkbook and a debit card.
Is this a time deposit or an on-demand deposit? I do not see interest being paid on on-demand deposits. That could imply that the bank is using that money and that it's not really there.
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.
Agreed, the bank is lying to you. I hope it is clear to everyone why this is unstable, and can even be considered fraud. If the bank tells you that the deposit is on demand and always available, then it better always be available. If it's not, that's a contractual failure and fraud.
If your money is used to buy a bond, on the other hand, this isn't fraud. You know that the borrower can default and that there is risk, and you know where your money really is (it's with the borrower, not the bank). No lying.
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.
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.
Fractional reserve is OK so long as the banks aren't blatantly lying about what they're doing. Without a government ready to print additional bitcoins to bail out banks, you can bet that they will be more careful about what they're doing, since if they get caught in the lie, they're fvcked.
A few responses to the earlier points...
Fractional reserve banking is unstable without a monopoly over the ability to print currency, due to the >0 possibility that a bank runs out of reserves.
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.
Fractional reserve banking is unstable without a monopoly over the ability to print currency, due to the >0 possibility that a bank runs out of reserves.
I understand what you mean, but what I mean is that there will be no backstop called the Federal Reserve to bail out the banks when they go bust, and trust me, the greedy ones WILL go bust.
The way banking in BTC will likely work is that you will have On-demand deposits, and time-deposits.
On-demand deposits will be stored at the bank, and will not be lent out. You will likely pay a small fee for this service.
Time deposits will be lent out, but cannot be withdrawn at anytime. You will also have to accept the possibility of loss.
On-demand deposits will be stored at the bank, and will not be lent out. You will likely pay a small fee for this service.
Time deposits will be lent out, but cannot be withdrawn at anytime. You will also have to accept the possibility of loss.
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.
Yes, I agree with you here. However, I would demand honesty from the banks. I can surmise others can do the same. We can never be entirely sure what's going on; the banks could lie, they could be running a pyramid scheme; what we DO know is that honesty is in everyone's best interests, because there is no Federal Reserve to just paper over the losses when the shit hits the fan. I cannot surmise HOW this will be, but I do know that it will be in everyone's interests to see that it is done.
Not true. If I deposit 100 bitcoins at a bank, the bank lends out 90, and I want to withdraw my 100 bitcoins, the bank is screwed. Even if they lend out 25, the bank is screwed.
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. You're forgetting that Bitcoins are not an inflationary regime. It will be much more difficult to keep the correct number of Bitcoins on hand when you can't just print them willy nilly. A bank might be able to find an optimal number, and again, there's nothing wrong with this. I just think that for the banking system to be honest, they need to fess up and seperate time deposits from on demand deposits. If people want to go with riskier banks that do fractional reserve with the on demand deposit, that's their business. If it takes a few busts to scare people off from that, then so be it
I essentially agree with everything you say, but I see the dynamics as being different because there's no Big Daddy to bail the kids out from their mistakes when they mess up, yet again
