We all want Bitcoin to replace fiat, right? And banks too.
Well, one of the things that needed to be replaced is the feature of banks to provide loans. Loans are important for businesses, but also for consumers if they want to finance costly goods like houses and cars.
In a Bitcoin world, where everything is tied to BTC's value, this can lead to some complications. First there is of course volatility - it could be risky to take a loan in a Bitcoin bull market because what you would have to repay it could have a substantial higher value than what you got as loan, with a high risk of insolvency.
But let's assume the volatility problem has been solved, there's still a challenge. Current banks, when they give out a loan, create an amount of money on the account of the borrower. This money can be instantly moved to be used for payments. In reality it's a relatively complex process if we take into account clearing and interbank loans, but we can say that the fractional reserve system enables a high availability of loans at any time.
In a Bitcoin world however, a fractional reserve system can be imagined (like
Hal Finney proposed it here in the forum in 2010) but it would be very risky for banks, because there is no Central Bank and thus no lender of last resort. Banks would never be able to operate with a reserve as low as the 1% currently standard in Europe and the US, but probably need reserves of 30 or even 50%. This would indirectly lead to less availability for loans, a situation called
credit crunch or credit squeeze.
This is even aggravated by another problem: in a Bitcoin world bank accounts are not really necessary because you can use always a wallet, so there would be less deposits on banks.
From all I understand this would mean that less availability of loans would mean much higher hurdles to build up businesses, but also for consumers to finance their houses and cars. Economy would suffer a slowdown (at least if the other Capitalist mechanisms stay the same).
Do we have a solution for that? Well, those are some I can think of:
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ICOs, STOs and other token mechanisms. They would surely be a very popular way for medium- to large businesses to get money, and if regulations are not too strict, also for smaller ones. But the problem of an ICO is that you always need something "sellable", easy to understand for investors. So it's not a tool for everyone.
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Bartering. One could imagine bartering platforms based on tokenized (smart property) goods and services, where businesses could lower their need for liquidity bartering their own services for others. This however depends on the business already having a product/service.
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P2P lending. This could be something interesting for consumer loans, but the liquidity I expect to be relatively low, too.
- Loans in
Bitcoin-based stablecoins. I think here of something like Bitshares' BitBTC. These would be created by speculators shorting BTC, and can create additional BTC units even if they're not directly backed by "existing" Bitcoins.
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DeFi-style lending (cryptos as securities for other cryptos). This unfortunately today has very few use cases, because it needs crypto-securities as collateral. Maybe it could be combined with the tokenized smart property approach.
I would be interested in your opinions. Is my interpretation of a possible credit crunch right? What about the possible solutions I listed? Are there alternatives and even better ones?
I've not studied economics, so I may be wrong, but from my limited knowledge in the area that's what I think that could be issues the Bitcoin community would have to solve before really reaching mass adoption.
