Topic: Is credit possible with Bitcoin? Explain. - page 3. (Read 4115 times)

I didn't vote in the poll because there wasn't an option for "Yes, but with very different results than in the fiat world".  As far as countryfree's comment that you could still get a mortage with bitcoin banks - yes, this is probably true.  But forget about the 3% interest rates that you're seeing today (at least in the states), or even 5%.  It'd probably be at least 15%. 

Would credit be possible with bitcoin?  Yes, but it'd be more difficult, and therefore likely much more expensive in terms of interest rates.

Agree that false rumours would be harder to spread and I also agree transparency would lead to greater conservatism.   

However, it would be fascinating to see how things played out in the real world.  For example, banks today only need to publish their accounts periodically (e.g. quarterly) and go to great lengths to make them look good (e.g. the Lehman Repo 105 transactions, the tendency of companies to discount heavily towards the end of a period to get signings, etc, etc).

In between reporting periods, I suspect the numbers jump all over the place....  and the same would be true here....  even if a "Bitcoin bank" were very well run, well capitalised and had lots of liquidity, there would be periods where  good borrowers were a bit late and some depositors had drawn out more than expected - and a snapshot at that time would make it look like it was about to collapse. 

Perhaps the solution would be even greater transparency - e.g. the successful banks would also make their internal models and cash-flow forecasts public - and reconciled against the blockchain.   One thing's for certain, I don't think a bank based on obfuscation/secrecy would stand a chance.


Agreed.  So, in many ways, it would be similar to the gold standard days (e.g. the JP Morgan stories from the 1907 panic, etc).

And I guess you could be sure there would never be anything as scary as this  http://soberlook.com/2013/06/how-did-we-get-here-map-feds-balance.html

This might be a little off topic, but there's this Financial Times article today about the talk of "BitBonds"...
http://www.ft.com/cms/s/0/e9198f38-b7cb-11e2-9f1a-00144feabdc0.html#axzz2VhnrjxvE

So in a classic sense, MB (Monetary Base, the set of notes and coins in circulation or held as reserves) is the bitcoin network, and trying to increase it beyond 2.1E7 is a hard fork.
However that says nothing about M2 and friends. Partial reserve lending is possible, although I doubt we'll see take hold until the value stabilizes and the velocity of the existing monetary base increases.
What is really cool is that bitcoin separates the issue of storage from the issue of earning a return on idle money. These were tied together before, even when gold was around: In fact fractional reserve banking arose from the fact that the goldsmiths (who were tasked with storing other people's gold) realized they could issue more depository notes than they actually had gold for.
So now that there is no need for people to deposit at banks unless they want to earn an extra return, we may see a lower level of demand for bank services. Maybe.


Banks always lend a sizeable chunk of their own money alongside depositors. As long as that buffer isn't running out, there's not rational reason for a depositor to worry. It would take a lot of losses to trigger a bank run (like we saw in 2008). Knowing the exact amount held by a bank would also protect against bank runs being started on just a rumour, and it would encourage banks to keep and prove they have a large reserve, so that the depositors are reassured.
Also nothing stops the existence of a "lender of last resort". The difference is that unlike the Fed, it can't just print on demand, so it'd have to hold large amounts of cash to be sent to a distressed bank at a moment's notice. That would be pretty expensive.

I would only get a bitcoin credit card if could get a low low APR of 29.98%. And it has to be named after a precious metal.

I wouldn't mind living without many things most people take for granted, in fact I already have a very simple life. I haven't had a TV in my home for 20 years, but in the meantime, I've seen my friends throwing away their VHS recorders, then their DVD recorders, because they're now buying Blueray recorders and new larger TVs to go with those. I understand this is progress, but is that really useful? I wish there was less money around, so that people (and governments) would focus on the essential, and not waste time on superficial things. Who needs business cycles? We have seasons, birthdays, natural cycles, it's more than enough to avoid a boring life.

That is what they do.

Credit can and has happened already with bitcoin. Look in the loan forum, any one of the many ponzi scams, or leveraged trading sites. I'd be willing to bet that some fractional reserve banking has happened also. Even though the blockchain is public, I have no knowledge of anyone doing a serious audit on MtGox or any of the major exchanges. There is a lot of money sitting on those exchanges waiting for a spike in the price to sell. Although I have no reason to believe there's fractional reserve banking going on, it is trivial to implement. All it takes is using some % of deposits to loan out or go manipulate the market a little bit.

*This* is the key insight.

It is completely obvious that fractional reserve banking would be possible with Bitcoin but the transparency of the Blockchain makes it qualitatively different to the situation with, say, gold.

The Blockchain would make it possible to see all the deposits a "bank" had taken in and all the loans it had made, as well as the interest payments as they came back, and repayments of principal.

Sure - some of this might be obfuscated but I would expect market pressure to force banks to be as transparent as possible.

But that then creates a huge issue: everybody can calculate the bank's reserve ratio, can infer its loan and deposit terms and estimate default rates, etc.   An optimistic analysis would say that this would encourage conservatism and build confidence.  BUT... the moment the bank suffered a loss or a borrower stopped paying interest, *everybody* would know and a run would surely start within moments.

It is very possible that the economy would be healthier. On the other hand, it's very possible that you wouldn't have many of the things you have today. The system of fractional reserve banking allows businesses and governments to do things they otherwise wouldn't have while the money is free flowing. Sure, there is always a pull back and this causes the "business cycle", but we always progress as a result. You would probably be much healthier too if all you did was stay home all day and workout, eat healthy foods, and avoided all things such as smoke, tobacco, alcohol, microwaves, television, cell phones, etc. But you would also live a very boring life. We tolerate occasional hangovers because it is fun to go out and let loose once in a while.

I'm not trying to say I'm all for fractional reserve banking. But it is something to think about. I actually think we have progressed too far, too fast in regards to technology and it's time to settle down for a while. I would be all for a slow, healthy, and stable economy for several decades.

I agree with the nature of bitcoin not supporting credit. I don't know enough about ripple to give an informed opinion, although it seems incredibly complicated for mass take up and lifts the lid on a great deal of monetary and credit dynamics that I'm not sure people yet want to understand or hear. As with bitcoin I suspect any best-case long term future of ripple will be as a conduit for other assets and currencies, with little to no value apportioned to the backing concept except as a transaction means. And as I'm sure must have been debated before on this forum, although technically via banking/savings/investment I am already facilitating 'ripples' of my credit throughout the system, I'm not at all sure how keen people will be to overtly mix business with pleasure and peers once they've worked it out.

It says: "Building up the networks which would allow fractional reserve banking requries a transmission system which is nearly impossible to develop for bitcoin-like products, because it relies on adoption."

Again: Ripple.

Fractional reserve banking would be difficult, but that is good. Banking would go back to how it was before that was invented, with bankers only lending the money they actually own. Not a tiny fraction. I had wished for many years that fractional reserve banking would become illegal (the financial system would be way healthier,) and bitcoin could finally make that happen.

It would still be possible to get a credit by putting a mortgage on the house.
It would also be possible to get a financial institution to buy a car, and then rent it to its customer.

Bitcoins, Fractional Reserve Banking, and Private Currencies

That's the effect, but it's not like an individual bank has $100 in deposits and loans out $1,000. That is the symptom, but it's not that simple  if I understand correctly.

I like that idea, but Bitcoin is a whole nother animal.

the Bank has gained a massive weapon with bitcoins, they can monitor the effect of their investments worldwide to further calculate the probability of a ventures success by following the blockchain, also dead beat loans with the infrastructure that banks have(credit agencies) plus the blockchain means they can study the patterns that develop from abusive people with test loans, plus that API can make the bank build stipulations to their loans to make sure they are used properly, like a time release system for a loan, release amounts only every couple days.

also to maintain a fractional reserve system, credit cards demand a minimum payment every month to maintain their stocks a similar system would be implemented in bitcoins with stipulations on withdrawals amounts, we can learn from the current system, just need more bankers on these forums.

Have a look at BitFunder and BTCJAM and bitfinex for ways people are trying to do this right now.

There is fractional reserve banking, and there is zero-reserve banking, but you left out one option: full reserve banking. In full-reserve banking the deposits have an equal amount on reserve, any lending is done from the capital of the bank (as you suggested, the investors in the bank are funding the loans, check out the IBB (Islamic Bank of Bitcoin) for an example of this). For example, MtGox could be considered full-reserve banking (if what they tell us is true), any bitcoins listed in the customer accounts has an equivalent amount of real bitcoins in the MtGox wallet.

The alternative to fractional reserve lending is zero-reserve lending. With zero-reserve lending, you take in $1,000, for example, and lend out $1,000. The guy you're lending it to pays back $1,000 plus interest and the bank makes a little money.

But what happens when the guy who deposited $1,000 wants to make a withdrawal before the guy who borrowed it pays it back? There would not be money available to pay back the guy's $1,000. This cannot happen and the system will not work.

One way to work within these constraints is to use time-lending. Just like people put money into CDs for longer lengths of time to get higher returns, people could lend bitcoins to a bank for specified periods. The longer the deposit commitment, the larger the interest rate. Now a bank would be able to lend money as long as it was paid back before the time deposits expired.

But what happens when the guy who borrowed the $1,000 defaults? This makes the bank insolvent and destroys the deposits. There would be no FDIC under this type of system because it would be too expensive.  Of course, banks would have to go back to sound banking principles and only lend to strong creditworthy customers and secure ample collateral. But it would become much, much harder to get a loan than today. The banks would have to use their own money to pay back depositors when a borrower defaults.

One way to make this work is to lend out money that was invested not deposited. What if you allowed investors to invest in your bank. Of course they would want to know that you're making sound loans but the possibility of default is there. Investors would expect a higher rate of return than a savings account interest rate. But these costs would be passed onto the borrowers.

What if the bank became a facilitator for crowd-funding? There could be a list where people could put their requests for loans with all of the pertinent information one might need to invest. Then anyone interested in putting their money to work could browse this list and invest a little money in whichever projects he chooses, obviously for much better returns than a CD or savings account, but with added risk. There could be a professional "underwriter" working for the bank that gives his own assessment of the risk. Each bank would then be competing with other banks so the better job they do at underwriting, the more customers they get. The bank could also act as the enforcer, collecting collateral and go after deadbeats who do not want to pay back what they promised.

Look through the forum for pirateat40, Patrick Harnett, Kludge, and Dank. This has been tried already.

I know I've brought this point up many times but allow me to reiterate. Having access to all my money at any time makes me a target. Imagine for a second that the dollar, euro, and other currencies have evaporated and everyone is now using Bitcoin and everyone knows that everyone has access to his own money. This is very, very dangerous and could lead to all kinds of crimes. Therefore, I could see the need someday to have a third party vault, basically protecting me from my money. No one can put a gun to my head and rob me if I do not have access to my money.

This is EXACTLY what led us to the current predicament of fractional reserve lending today. The goldsmiths kept people's gold in their vaults because it was much safer than everyone storing his own gold. They handed out receipts or notes to their depositors declaring their balances. People began to trade these notes rather than going to the vault to withdraw the gold, exchanging it, and then the recipient depositing back into the same vault. They came to the realization that it didn't matter how much gold was actually in their vaults, they could simply lend as many notes as they wanted to. This became known as fractional reserve lending.

The people on these forums are probably smarter than the average person. But the stupid ones FAR outnumber the smart ones. The banks will do EVERYTHING in their power to gain back the control of the currency. It is impossible to lend out more gold than is in existence and, yet, they found a way to do it because the stupidity of the masses allowed them to.

Those who do not learn from the past are doomed to repeat it.