Topic: BitCoin Bank (Read 10024 times)

Hello all,


I notice that there are a lot of misconceptions about fractional reserve banking flying around here. There is a great confusion between the current government central banking fiat currency system (which HAS and DOES print money out of thin air) and sound fractional reserve banking. They are not the same and FRB need not be inflationary. In fact, when done properly there is very little difference between a fractional reserve bank and a 100% reserve bank. A 100% reserve bank can earn just as much money and get just as much interest as a fractional reserve bank. Yes, possibly even more. I describe how this can be done in the following article:

http://onarki.no/blogg/2011/04/fractional-reserve-banking-vs-pure-gold-standard/


However, due to the hyperdeflation in bitcoins at the moment banking is currently impossible. A proper bitcoin bank must wait until the value stabilizes.

I think a bitcoin bank loan would be possible using a mining pool.  That is to say, a pool's owner could set up code that allowed a loan to take place (using whatever comfort zone they have for a loan for a particular user.  If you're a newbie, probably a small loan, if you've been with it a while, especially if you're a huge contributor, then perhaps a large loan).
 
Then the payback could be hard coded such that some percentage of their contribution is pulled out automatically (to prevent someone from never paying it back) and then would keep pulling out that percentage until the loan is payed off (plus interest if desired), then they could go back to getting their normal payouts.
 
e.g.
The collateral would be the potential of a particular debtor:  ie if I've been with slush for, let's say a month, and I get about 15 coins per month, maybe he thinks I'm worth 10btc, and is willing to risk 10btc but only if I pay back 75% of my earnings each time there's a pay-out back to him until I've paid off 11btc.  Does this make sense?  So once I hit the 1btc mark (my current payout mark), then 25% of it would go to me, and 75% back to slush until it's paid off.
 
But maybe a year from now I've put together an awesome machine and earn myself 100 btc during that month, then maybe slush decides he'll risk an 80btc loan at a similar payback.  etc.

Someone could still cut and run, but that's up to the pool's owner to decide who is worth what, and at what risk.
 

FRB is not applicable to savings and loans banking. And a deposit bank for bitcoin is pointless...

Honestly I'm not sure what you're here to argue about.

You keep wanting to assume that banks have to make loans and pay interest.  And I'm telling you that this is emperically false.  It's not even the way banks operate today.  Go sign up for a savings account.  See how much interest you get.  Apply for an unsecured loan.  See if you get one.

Banks today operate by enabling trade, not savings or investment.

Right, but if some day the deflation becomes equal to the increasing worth of the economy, lets say 2% p.a., then a bank can take some percent too and everyone will be able to pay this back with some efford.

A bank always considers the expected inflation or deflation when determining interest rates. With a high deflation interests for both saving and lending would be low. A saver would accept a low interest as he also gains the increase in value from deflation. The one ledning can only pay a low interest as he also have to pay the increase in value.

Deflation do not by itself pose a problem for a bank, but it can indirectly: As you say the return on investment of any venture backed by a loan has to be bigger than interest plus deflation. This could limit the number of such ventures. But the problem is not the bank as it only adds a little to the return on investment you need to break even compared to if you used your own saved money (for example 20% deflation and 2% interest).

A much bigger problem today is the unpredictability of the future value of BTC. Both depositing and lending BTC is very risky for all parties includning the bank.

With regards to the discussion of collateral.  It might be possible for the bitcoin bank to hold title to the asset being purchased with a loan and then when the loan is paid off, turn the title to the asset over to the payee of the loan.  Until the loan is paid in full, the bank owns the asset being borrowed so if the payee breaks his/her agreement with the bank, the bank keeps the asset.  If all borrowing records and deed records are public, this could potentially be enforable by the community, but it would not be as private as not taking the loan or not using the bank. 

I think the more serious question is business banking.  The operation of a board of directors differs with juristiction.  I know that there is a BTC Stock Exchange being started and that is fantastic.  If companies are going to IPO on it before we have a bitcoin banking system, I would assume that they would be previously incorporated in other juristictions.  This is fine.  PB is listed on stock exchanges in America and the UK and has business units all over the world.  Do we hope to one day have a legal system within in the global bitcoin community?  Otherwise even if our money is not tied to any government, is our bank (if we choose to use it) or our Stock Exchange?

Thank you for your reply.

Even if there was a fractional reserve in this example i would not have a problem with it. Fractional reserve banking is not the problem with bitcoins, it has been done with precious metals since the middle ages.

My problem with this example is the following:
Bitcoins are highly deflationary. Let's assume 20% deflation in bitcoins and 0% interest that you have to pay to the bank. This means you borrow 100BTC at the beginning of the year and have to pay back 100BTC at the end of the year. By the end of the year, these 100BTC will be worth 20% more than at the beginning. To make up for this 20% difference, the debtor needs a return on investment of at least 20% for his business. If the debtor also has to pay interest, the required return on investment would be even higher. This makes it impossible for many debtors to use borrowed capital and thus makes many businesses economically unfeasible.

20% deflation is a rather conservative estimate of bitcoin deflation. This is the reason why bitcoin banks can't earn money by lending out capital, which makes it impossible for them to pay interest to depositors.


alexk

I can show it:

A deposits 100 BTC and is promised to get 110 back in a year.

B loans 100 BTC and promise to pay 120 back in a year.

After one year the bank has earned 10 BTC.

This example is not fractional reserve as the bank got assets covering all its promises. The bank is just a boker of loans between it's customers. A could of course lose his deposit if B never pays and this forces the bank out of business, but even if the bank just stored the BTC they could be stolen by a hacker. Deposits are never 100% safe.

Fractional banking works as well with bitcoins as with any other asset.

Person A deposits 100 BTC at the bank and gets interest. He can withdraw them at any time.

Person B loans 90 BTC from the bank and pays interest. He have to pay back within a year.

The bank only has 10 BTC but have promised to be able to give A back his full 100 BTC at any time. This makes it a fractional reserv bank with a 10% reserv. If A want to withdraw more than 10 BTC the bank will have to take a loan to cover it, but as it isn't sure the bank can get this loan A can lose his money.

Some argue that the total ammount of BTC in this example is now 190, and that the bank has fraudulently created 90 BTC. If this is the case or not is a matter of definition but as long as the depositer knows about the fractional nature of the bank, I would not call it fraud.

Ok, you can continue making up your own definitions. According to http://en.wikipedia.org/wiki/Loan credit card debt is an unsecured loan, which i already pointed out. This will be my last post regarding this subject, i'm not here to argue about definitions.

If you can show me a way how a bitcoin bank can pay
1. interest to its depositors or
2. earn money by lending
i will be happy to continue with the discussion.


alexk

Well, in the US, credit card debt is normally a loan of goods or services, when it's not a cash advance.  So it's consumer credit.  I'm not sure what the definition is wherever you live.

Regardless, loaning Bitcoins isn't required for such services; and they can support a Bitcoin bank perfectly well.

Ok, i think i understand now. You are mistaking credit cards for consumer credit. These are not the same. Consumer credit means, that someone has to pay for a product at a later point in time and is charged interest in return. Credit card debt is a loan, which also costs interest.


alexk

Sheesh, you can't read the first paragraph?


Consumer credit is vendor finance.  The point is to get people to purchase stuff, not to pay interest.

I don't see anything in that wikipedia article supporting your argument. Can you point it out please?

http://en.wikipedia.org/wiki/Loan

According to this article though, credit card debt is an unsecured loan.


The discussion if a credit card debt is a loan or not is irrelevant to my first argument anyway. A Bitcoin Bank can not give out interest at all, because there is no way it can profitably lend money in huge amounts to debtors. So there is no financial incentive to put your Bitcoins in a Bitcoin Bank and i think this prevents Bitcoin Banks from having any success, as long as the bitcoin money supply scheme stays deflationary.


alexk

That page doesn't say consumer credit isn't a loan.

Yeah consumer credit isn't technically a loan.

http://en.wikipedia.org/wiki/Credit_%28finance%29

So credit cards are not loan business?

Lots of big banks these days don't pay much in the way of interest, half a percent or so.  And their loan business is crap.  They make money on credit cards and transaction fees.

I think a bitcoin bank can not work.

A bank earns money by collecting money from depositors and offering them interest in return. The bank uses this money as a fractional reserve, and lends more money to creditors and expects interest in return. The interest for the depositors is being paid for by the interest of the creditors.

In a strongly deflationary environment it's not easy for the creditor to pay back the loan, because by the time the credit falls due for payment the money is already worth more. For the creditor to be able to pay a positive interest rate, his business needs an roi > deflation rate. Many businesses will not be able to provide this when the deflation rate becomes high. Then lending out money for a bitcoin bank will hardly be possible which also makes paying interest to depositors hardly possible.

So, in my opinion, there is no incentive to put bitcoins in a bitcoin bank.

If bitcoins had a stable value, this problem would not exist.


alexk