Topic: Is credit possible with Bitcoin? Explain. - page 4. (Read 4115 times)

I think the Bitcoin system sets a dangerous precedent for the banks.  A currency that cannot be fudged at all, the total amount is accountable at all times... what is preventing the banks from doing this? What would happen if the governments began passing laws that made it illegal to have unaccountable money? I'm sure somewhere we can analyze how much money is being created vs destroyed by the central bank, if this number when added up worldwide is larger then we know that something very wrong is occuring with our financial system, banks are creating fake money by copy pasting digital numbers.

everyone pays with their debit cards now, how would you ever know that they did not have enough money? people only use cash for drug deals anyway.

Well of course its possible. I could lend you some of my (meagre) coin and charge you interest on the loan.

But more profitable if I set up a "bank", take deposits in BTC (which I transfer to MY wallet), offer silly rates of interest to attract the punters, and (optionally) lend out some of those deposits to my credit customers. Classic ponzi scheme (just like the fractional reserve banking described upthread, that seems to be accepted as perfectly legit in the banking world.) I'm surprised nobody's already tried it (perhaps they have, I'm new on here so does anyone know?)

[Edit] Of course real world banks don't offer silly rates of interest to their depositors, which is why the legit ones are not ponzi's. So that model also works with bitcoin (provided there is no run on the bank, in which case you just say sorry and apply for chapter-whatever).

A fractional banking system would be possible, but it would be rather difficult to set up. People would have less incentive to use it than the traditional banking system. One reason people use banks is because they allow you to quickly and safely access your money without carrying cash. The point of bitcoin is to allow people to do this but without the bank middleman, but instead with our computers and p2p network. Without this benefit, to convince people to give up control of their money, they would need to offer high interest rates and/or offer features that compensate for the weaknesses of bitcoin like instant transactions or instant conversion to USD to get the deposits necessary to set up a fractional reserve system.

Also, here's an explanation of how a fractional reserve system works. People deposit money in a bank. The bank lends the money out to people. Those people redeposit the money into a bank. That bank lends it out to another person. They deposit it and so on and so on. If everyone keeps depositing the money back in (and everytime someone spends any, the recipitent alsodeposits it into a bank) you can just keep lending out imaginary money in the form of numbers on the banks computer. (Of course, in reality, you run into trouble when a couple people actually wants to withdraw money and the bank realizes "Crap, we dont actually have any money" so they usually keep some some percentage of the deposits they get as cash in reserve which is good enough unless a significant number of people want to withdraw their money ( or more likely in our current bank controlled economy, move their money to another bank). After the banking crisis during during the great depression, the percent kept in reserve is a federally mandated reserve ratio set by the federal reserve.

Like you said.

The people have become their own bank; Why would knowledgeable Bitcoin adopters believe the lies that are being spread by banks?(anonymous? what a joke) paypal(use it to trade on a worse system, why?).

The BlockLedger makes things very difficult when you can follow the assets of any entity. A bank/broker would have to make their deposit address public, and then you follow the ledgers trail, Bitcoin is ultimate accountability, you can only allow the things that you permit in any contract you sign. If they are not investing your BTC the way you want it to, you'll know.

Individuals being their own lenders can begin giving credit and expect returns from borrowers, follow the trail and see the health of that company or individual, and with the BTC API they can in fact become a chain of guarantee of use, the individual can become a partner; Shareholders have greater say if they so desire, thanks to the Bitcoin API a contract can be written in direct code to match the legal one.

Fractional reserve is definitely possible, with bitcoin if explicitly allowed by the lender or if they just don't care to be accountable for their money. After all the reserve is based off of future returns, fluctuations in the value of money, etc, all calculatable to a certain degree and with the blockchain those calculations become better and better everyday, because not only can you follow the borrowers account, they can follow yours to calculate when you will be coming in to withdraw your money.

Bitcoin is the most open system ever created, with infinite flexibility thanks to it's design.

One could aruge that fractional reserve banking is not possible with Bitcoin, but for an entirely different reason than the internet crazies would. Banks are required to keep a fraction of deposits in assets. But with Bitcoin, no such enforcements are in place. So if you think of banking as something regulated and enforced, the answer would be no.

You could start a Bitcoin bank and claim that you would guarantee a fractional reserve, but if there is no regulation there isn't really any legal standing to this claim. It would be a bank in name only. You could start a Bitcoin bank and spend every penny of your customers desposits while still pretending that all bank accounts are full (which would indeed be a scam).

Like with any asset, you can:

1. Lend it out physically at whatever rate you want. Like, give a gold bar in hands of a borrower. Or send BTC to someone's own address.
2. Lend out a paper receipt (or a digital receipt) which is basically a promise to deliver something (gold, bitcoin, apples or oranges) in exchange for that paper.

Fractional reserve banking was made possible during gold standard because gold was expensive to move, store and cut. So everyone ended up using paper promises issued by banks. Before banks organized in a central bank there were frequent bank runs putting a hard limit on how much you can print over your reserves. Once the central bank was established, it was ultimate printing organization within a nation-state. To make a bunk run on it, one would have to move money between countries (this happened before/during great depression when european banks asked U.S. for physical gold in exchange for U.S. paper). Today every country has promises only within its own gold-less currency and hands out IOUs to other partners.

With Bitcoin fractional reserve banking is very limited because real BTC is as easy to move and verify as paper IOU. Every single wallet is a bank in itself. People just don't need to trust anyone to handle their assets. You can trade directly in this digital gold.

If some bank decides to issue BTC-backed IOUs, it will face constant withdrawal demands every single day and will have very little BTC in reserves. If they overprint their IOUs people will quickly get all their coins out and bank will shut down. Some people would lose money, but it won't affect anyone who was trading in BTC directly without that bank's paper. Not only directly, but also indirectly. If prices are set in BTC, not in IOUs (think: in gold grams, not USD), then global depressions won't be possible because of a single fractional reserve bank printing IOUs. Prices will remain stable in sound money (gold, BTC) and will grow in USD or whatever IOU is currently in use.

I would have agreed a while ago. There was just no infrastructure imaginable for Bitcoin IOUs (essentially just MtGox codes or the like) to become popular.

However, then Ripple came along. If it gains mass acceptance, it will make handling IOUs a lot easier, maybe even easier for most people than to deal with Bitcoin directly. And gateways like Bitstamp (and MtGox probably soon) will theoretically indeed be able to issue more IOUs than they actually have.

To clear things up semantically, Fractional reserve banking is the process of assigning multiple owners to the same coin on deposit, then hoping that a threshold number of depositors do not attempt to withdraw simultaneously. The law of large numbers makes this process very reliable (and profitable). However with bitcoin, it would be difficult initially to get to the safety of that large number (of deposits).  You can do FRL with anything, the inability to print bitcoins is tangential and will only affect (raise) the cost of deposit insurance for the bank.

It is possible to do fractional reserve banking with bitcoin.  Fractional reserve banking does allow to you to lend money that doesn't exist-- indeed that is exactly what banking is all about.  The banks lending more money than they have on deposit is how money is created!

The fact that the bitcoin supply is limited to 21,000,000 doesn't stop the banks for lending out more than that-- if all these bitcoin were deposited in bitcoin banks then using the current reserve of about 10% of traditional fiat banking the banks would lend out 210,000,000.  What the banks are really dealing with is not bitcoins but rather promises made about the bitcoins: that's why they can create more--  a promise is a very easy thing to create while a bitcoin is not so easy.

If Bitcoin became widely adopted, it could (and probably would) function exactly like any currently popular fiat currency. (Dollars Euros Pounds Etc.)

There's no real functional difference except that there wouldn't be a government that could print more money, therefore I see no logical reason that credit and banking would not work the exact same way it does currently.

With banks currently, if, say, $1000 was deposited with a fractional reserve of %10, the bank would then loan out $900 of that same $1000 to other people.

All you have to do with is replace the above $ with BTC and you have the exact same system using Bitcoins. There's no reason this couldn't work with banks, credit card companies, loan agencies etc.

Now if you were to question whether it's likely to happen currently, that's another question, but once the price stabilizes and adoption becomes high, I guarantee you'll see Bitcoin banks and credit agencies.

+1

Banks and credit markets will only be better. No more bailouts (governments can't print bitcoin), hence the markets will adjust for higher risk.

Fractional reserve banking doesn't allow lending money that doesn't exist, it just permits lending money that you don't personally have even though someone else does.

Anything can be abused.
Fractional reserve doesn't seem possible with BTC, no way you could lend btc you didn't have. But it would be possible to create a system that lent $ (or some other fiat) based on holdings of BTC. I don't see why anyone would, but thats a different question.

Many in the Bitcoin community seem to believe that credit is impossible or very difficult to create with Bitcoin, and especially that a fractional-reserve system is prevented.

I have heard some very flawed arguments for this, but also some that may have some merit if properly explained.

My personal opinion is that Bitcoin is the same as cash or gold (but closer to gold) in this regard. Am I correct? No? Explain, discuss and debate!