a custodial wallet issues a loan to user account, and real btc transacted only when user withdraws
so the custodial wallet can act just like a bank (managing it like a real bank may run into some issues)
I take your point, but with fiat, banks can just change numbers in a database without any money actually moving. If you try to spend loaned bitcoin anywhere other than sending it to another user of the same custodial wallet, then they
have to have enough bitcoin in reserve. Fractional reserve could only work with a very high fraction in reserve.
first you have the price of bitcoin constantly chagrining which means paying the loan back will vary depending on the price
The contract for any loan would simply state whether the repayment value is based on BTC or fiat.