Currency scarcity: Bitcoin versus USD

[drewtam]

But you can't engage in fractional lending (take deposits worth 1000 BTC from depositors, then loan 5000 BTC in consumer loans).  It's mechanically not possible.  You could never go over 1000 BTC.  And, given the fact that your depositors may be engaging in "checking account" types of activities, you may only be able to safely conduct business with maybe 100 BTC of that 1000 BTC.  Or less.  or more.  Who knows?

That's not how I understand the accounting of frac res banking.

They don't loan out physical money they don't have. Its either money they got from depositors, money they borrowed from other banks, or money borrowed from the fed reserve.

From my understanding of frac banking, and BC operations, it does sound like one can actually do frac banking with BC.
Step 1 deposits

Step 2 lend
[deposits change from physical assets to IOUs]

Step 3 retain enough BC/$ to pay depositors on demand (~10-30% is typically needed on hand, depending on how many depositors are using the business and their typical demand patterns)
[depositor can almost use the money on demand, borrower also has access to BC/$]

Step 4 get paid interest on loans

Step 5 pay depositors a smaller interest


Also perfectly setup to run a side business of escrow services. Isn't that part of how banking got started in the first place? Just like current BC services?

Seems the biggest risk is that BC is not FDIC. So like the bad old days of the 1930s and before, a run on the bank means depositors are SOL.

[AZRedhawk44]

Current SOP on frac reserve banking is to loan out 50 times the amounts on deposit.

Can`t do that with BTC. Impossible. Couldn`t loan out more than 1x the amount on deposit, and that wipes out depositors.

[drewtam]

Current SOP on frac reserve banking is to loan out 50 times the amounts on deposit.

Can`t do that with BTC. Impossible. Couldn`t loan out more than 1x the amount on deposit, and that wipes out depositors.

I don't think that's strictly accurate. The typical 10x ratio comes from more people depositing, not on the first deposit.

Deposit -> Loans & IOU
Loans -> new deposits 2 -> new loans 2 & IOU 2
new loans 2 -> new deposits 3... etc
http://www.learningmarkets.com/understanding-the-fractional-reserve-banking-system/

Money is not created by being in 2 places at once, it is created by replacing it with IOUs. The IOUs are immediately redeemable at any time the bank is open; thus having the psychological and macro economic affect of being in 2 places at once, but not literally possible. You're not convincing me that BC can't do the same.

I (the bank) have a deposit (person A), 10BC in my wallet.
I replace 90% of the deposit with an IOU (10BC - 9BC). But keep 10% (1BC) on hand just in case the depositor, Person A, needs some of it.
The other 90% (9BC) I give to someone else (person B) as a loan.

The borrower can convert it to $, or pay someone else 9BC (person C). If Person C keeps it in his wallet, that's the end of my banking leverage.

If on the other hand, Person C deposits in my bank too. Well now I have in my wallet and on my books another layer of complexity:
1BC from A on hand. I owe him the other 9BC but I don't really have it, its just an IOU.
and 9BC from Person C in my wallet

So my wallet has 10BC again, but I owe Person A & Person C  19BC combined. (liabilities)
Person B owes me 9BC + interest. (assets)

So the money is never in 2 places at once, it has been augmented by IOUs, then recycled through this process several times. Just like gold can be used in frac reserve banking while not occupying the 2 different places at the same time, so could bitcoin.

Person A & C are taking a risk in trusting me with their money. Since I am not FDIC insured, if my bank fails, they might be SOL.

[AZRedhawk44]

I dunno.  I'm not a BTC expert, just an advocate and aficionado.

But my understanding of fractional reserve lending means you can loan more than what you have on deposit, which is impossible with BTC.

I'm open to all free-market ideas with currencies other than FRN.

[Balog]

The problem would be getting people to accept the IOU's, which re definitionally not BC.

[zahc]

Correct. And in the Real World banking system (snicker)bpeople mainly accept the IOUs (in the form of USFRN) because they are essentially forced to (through legal tender laws).

In a free banking scenario people would look at you and say "why would I accept that IOU as currency? Who is going to accept that?". In the Real World system, the answer is "everybody will accept it, because they have no choice".

[drewtam]

I don't think you guys are understanding the explanation. Maybe I'm not good at explaining, yet I plow ahead anyway...

The IOUs are implicit. Whether its gold, BC, or $. You always receive the nominal "money" when asked, but it is never left in the vault, only a fraction is left.
The bank account says all your money is available, but its a quasi-lie. The vault is mostly empty, and your money is lent out. The cash is not in 2 places at once.
What you withdraw from the bank is covered by a floating fractional reserve. If everybody asked for all of their money at the same time, the lie would be exposed, the bank would immediately begin borrowing from the Fed Res to cover the demands. If the bank failed or was insolvent, the FDIC would make sure everyone gets paid, eventually. One way or another, the "money" is never in 2 places at once, and the accounting balances.


A bank can only lend what it has in reserves. Those reserves can come from deposits, other banks loans, or Federal Reserve loans. The accounting must balance.

A bank can only loan the cash they have on hand. That cash can come from deposits, other banks loans, or Federal Reserve loans. The accounting must balance.

[CNYCacher]

Yeah, there's some serious confusion about what fractional reserve banking is.

You can't lend out more than you have been given to hold.

The 10% rules means that you have to keep on hand 10% of what you are given to hold. The other 90% you can lend out.

If I am a bank and AZ gives me $1000, I can loan $900 to Zahc. If AZ wants his $1000 back, I'm in a bind. Banks avoid being in such a bind by having many many customers and the odds are simply that not everyone is going to try to close their accounts at once. That's called a bank run and George Bailey explained such a situation quite well in "It's a Wonderful Life" if you want to learn more.

[AZRedhawk44]

I just don't see "banks" having a place in BitCoin.

However, I do see a valuable role to be played in regards to financing.  However, this would be capital brokers only, not a place to store funds. 

Otherwise, without some sort of asset pooling into central locations, financing large purchases with BitCoin becomes a process of dozens or thousands of separate contracts with individual BTC holders. 

The capital broker would have an information portal with pitched contracts, credit worthiness of the borrower, and rate of return rewarded to this investor.  If the loan would be made at 10% annually, the broker might reward a large depositor who contributes the lion's share of the loan capital with 8% of the interest.  Smaller contributors might only get 3-5% return since it's harder to source capital from disparate sources like that.

This would then result in a contract more on par with a certificate of deposit account than a savings/checking account.