In comparison: Banks do fractional reserve too. But there is public reliable info that they do it, and that they even have a legal permission to do it ... fwiw
So you knowingly agree to such terms when creating a contract with them.
Maybe we are disagreeing here, in part? because I doubt that the bank is very much different, except they are just doing it on a larger scale, and they specialize in that kind of service of loaning and creating money and sure they follow standards too.. and they have licenses and permissions.. but we are able to do those kinds of things too.. just more informally.. and of course, banks might get so specialized and BIG that they are permitted special status to fuck people over.... and you remember in March 2020 or soon thereafter, banks were allowed to go from 10% reserves to zero% reserves...
Moral hazard in regards to loans and creation of money can exist on either side of the loan. Maybe we don't really disagree? - each of us is just emphasizing different aspects.
Yes we could do it ourselves. The important part is if the contract partner is informed or not (or can be sure) that the lender is doing fractional reserve. With banks you are informed, and you can take that knowledge into account when deciding for or against a contract.
With exchanges though, I estimate that none of them publicly admit to do fractional reserve although many of them certainly do. So they never disclose it to their contracting partner, which turns it into some kind of legal or at least moral fraud (depending on local laws)
Of course they engage in fractional reserve, and I doubt that governments are going to necessarily want to stop them from engaging in behaviors to attempt to undermine bitcoin - even though sometimes they might give some lip service to "protecting people" so both of us realize, likely, that it will take a while to change behaviors and even for customers to realize that they might have to be able to preserve their contractual relationships with third parties that allow them to take possession of their coins. Some third parties will be more responsible than others, and so we all have to get used to some of these dynamics, including figuring out how much we might want to participate in any of those transitional services that are going to continue to evolve. but not without several casualties along the way including that some of us could become casualties as well if we do not sufficiently / adequately play our own hands.
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sure, you and I know exchanges do FR but it must be disclosed to their customers in order to not be fraud, IMO