Topic: Is Fractional Reserve banking possible with Bitcoin? - page 3. (Read 5986 times)

clearly bitcoin banks would have to pay you interest, and/or provide features like exchange, off-chain transfer, etc... in order to get people to lend them money.

In order to have fractional reserve banking people must save money in bank accounts. To make people do that you must make their money worth less and less by printing more and more. So people are happy to be able to save money, with interest rate a little below inflation.  No inflation - no need to save bitcoins in a bank (unless the bank is paying you interest above inflation, loosing money, or convince people somehow to give them their money).

Fractional reserve banking started because gold and silver were not useful as a currency in an emerging economy (too expensive to divide and transfer). So gold ("money") was stored in banks and their receipts were used instead as a "currency". Banks were constantly lending out more receipts than they have gold and ultimately, took over the government to legalize the procedure. Then, the gold was almost outlawed as money (see 1933 confiscation decree by Roosevelt) and finally Nixon ditched any gold obligations from under USD.

Bitcoin is not only money (like gold), but also currency (like USD bills). When there will be efficient standalone wallets and vault apps and devices, people wouldn't need banks and wouldn't need money substitutes (bank promises). Therefore, discussing fractional or full "reserve" would be irrelevant. There simply won't be currency that needs to be "backed" by anything.

In certain cases of some clearing houses or networks, there will be some IOUs, but those would be automatically redeemed on regular basis without any emerging risk of bank run. Those IOUs will only be useful as means for micropayments or frequent payments. Since Bitcoin encourages savings, demand for credit would be much smaller and certainly not in realm of micropayments, so even small fraud in these clearing mechanisms won't be even viable.

Clearly, it is possible. Whether it will actually happen, though, I don't know.

I wouldn't be surprised to see most people start to use off chain transactions, which increases the chances of it happening by a ton. Already, places like Gox/Bitstamp could engage in such practices easily.

It is possible with off-chain transactions, it wont affect bitcoin value, but the "business" will crash when a "bank run" occurs...

Yes, this has been discussed before.  Try the search feature - I think you'll find what you're looking for.

Example from doing this: https://bitcointalksearch.org/topic/fractional-reserve-banking-in-bitcoins-nothing-prevents-it-22553

Hello,

My thought is this: since fractional reserve banking basically creates money out of nothing, wouldn't it be impossible to have such a system based on bitcoin? If so, how would this effect bitcoin's potential as a global reserve currency (if it indeed has any)?

(I've been a lurker here since April, and I've found these forums invaluable for understanding this great new mystery that is bitcoin. Some very smart people around here)