Topic: What is your idea about fractional reserve practice at bitcoin exchanges? - page 2. (Read 3903 times)

Have you ever heard of MT. Gox?  If not why don't you take a google they tried fractional reserves..  Did not go too well.  This is why we the gov should keep the F out.. alas they are pigs and will attempt to countrol everything to give the other pigs at the top an advantage.  Lucky for us most of them cannot create a txt file.

Fractional reserve is ok if they are willing to cough up any loss due to taking risk on directional bet or even lending.

Well, duh. If you want to run a financial institution, you have to have some money.

I would disagree that traditional fractional reserve banking is a scam.

What happens in a traditional fractional reserve system is that someone deposits $100 in a bank, so the bank would have $100 in assets (the $100 bill) and $100 in liabilities (the deposit to the account holder). What the bank will do with part of the $100 is they will lend it to a borrower. So now they will still have $100 in assets (now a $10 and $90 that is owed to them from the borrower) and $100 in liabilities (the same $100 deposit).

What is potentially happening with Chinese exchanges is they are taking a 1 BTC deposit, and spending some amount of it, say .1 BTC. In this example they have only .9 BTC in assets (they spend the .1 on themselves) but 1 BTC is liabilities. Hopefully you can see how different these two scenarios are.
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Right. Trouble can occur if a bank has bad loans, which is what caused the last financial crisis. But there were real loans, and real houses behind them. What happened was that the value of those houses declined, and the people owning them stopped making payments.

Also, banks are heavily regulated, and in many countries backed up by deposit insurance. No US depositor lost money because the bank in which they had a deposit made bad loans. (Many bank depositors in Iceland did lose money. Look up "Icesave".)

Fractional reserve banking does not mean the bank gets to skim off most of the money.

Fractional reserve is almost necessary for exchanges to run without having massive amounts of principal.

Well, bitstamp and btc-e also don't provide such transparency, and MTGOX used to be the worst

It is a fact, since trading data and real money are separated on the exchange, there is a lot of room to play around, just like a bank do, you never know what is going on behind the scene until one day that bank suddenly claim a liquidity crisis -- their vault has been emptied since long ago, all the numbers on their customers account are just virtual

I've been saying this and no1 listened.

Most of the westerners dont understand crap about Chinese culture. I'm not discriminating but its the fact that when it comes to money, Chinese are all about cheating.

Look at Chinese stock market and all the scandals from "investment brokers"

Regulation in China  means " corruption". Most Chinese stock traders are actually low income citizens (factory workers, minimum wage labourer), they treat stocks as gambling.


I'm shocked and disappointed to see NO ONE asked Houbi , OKcoin at whatever conferences they participated about proof of transparency. Its safe to assume they're all thieves. In China, thats 90% the case.

When you deposit 10 bitcoins into an exchange, they move those coins into their cold storage, and they publish that address, so that you can check that they indeed have your bitcoin in a secure place, this is all fine

And then you open the trading platform, place an order of selling 10 coins and receive 5K dollar. On your account, you will see that you now have 0 bitcoin and $5K, but if you look at that address they provided you, you will see that those bitcoins are still there

So what you see on the trading platform is exactly like what you see in your bank account, those are just numbers in a database, they changes upon your trading activity, but the real fiat/bitcoin never moves until you do a deposit/withdraw

Actually the trading activity on platform always carry out in a database, never touch the real money. Suppose that the exchange added an account into the database, which has 30K bitcoins, then this account could immediately start to sell those coins on the exchange, without physically have 30K coins at all

The key for auditing is this database. By manipulating this database, an exchange who has only a little coin could create huge amount of  coin transaction volume by creating fictional coins in their database. That is the reason some of the Chinese exchanges suddenly had that huge volume during last year

I saw BTC china just provided open letter to let third party to audit that database, that is a great step forward, but all the other exchanges provide no such transparency so far

They could do what you describe in your OP without leveraged trading.
Leverage is a tool for investors *cough* to lose their money faster *cough* and not a way for exchanges to rig the system.

If an exchange is untrustworthy can just run away with your money. They don't need to introduce more trading options for that to happen.

I would disagree that traditional fractional reserve banking is a scam.

What happens in a traditional fractional reserve system is that someone deposits $100 in a bank, so the bank would have $100 in assets (the $100 bill) and $100 in liabilities (the deposit to the account holder). What the bank will do with part of the $100 is they will lend it to a borrower. So now they will still have $100 in assets (now a $10 and $90 that is owed to them from the borrower) and $100 in liabilities (the same $100 deposit).

What is potentially happening with Chinese exchanges is they are taking a 1 BTC deposit, and spending some amount of it, say .1 BTC. In this example they have only .9 BTC in assets (they spend the .1 on themselves) but 1 BTC is liabilities. Hopefully you can see how different these two scenarios are.

I think that is real. Look at the fiats market, USA's credit, and other economics global credits with fictional fiats. After that btc fictional credit story look like a joke.

It's big trouble. It's just a matter of time before the exchange owner blows the money on alcohol and girls. This is a real problem with high rollers in china. I try not to use an exchange and when I do I try to avoid china but when I can't I get my money back as soon as possible.

Agreed completely.  What is concerning is that it is very easy to implement a proof of reserves feature; why aren't all exchanges doing this?

Yes that can be done, but it does not stop even this specific exchange from practicing FRB

For example, an exchange through third party auditor shows that they have a daily holding of 50K+ coins in their cold wallet address. Customers can be sure that their coins are safe

However, on exchange's platform, everyone's account balance is just a number, only when you withdraw, they need to take bitcoins out from that cold storage, in the daily audit, they always have 50K+ coins in their cold wallet (suppose the amount of  customer deposit and withdraw are almost equal)

Now since all these 50K+ coins are just sitting there collecting dust, the exchange could loan out 80% of those coins to themselves (they can not loan out to other exchanges, that will affect their cold storage balance). That is just an accounting record on their own book. Now suddenly they have 40K coins at hand ... to sell

So they start to dump all these coins on the exchange and drive the price much lower, and will cause more panic sell and they collect real coins during the process. The interesting thing is, customers can see that the amount of coins in their cold storage even increased, but most of the customer won't withdraw bitcoin, they might even want to sell the coins and withdraw fiat money, this will create a liquid squeeze of fiat money and very quickly the fiat money on exchange will run out, and the price crash hard

Of course then smart money will run into this exchange to buy coins and withdraw, the withdraw will directly affect exchange's cold storage thus they have to buy back coins to reduce the size of their loan, but if the price were so low and many people's confidence of bitcoin get hurt, it will take a long time to recover

The best solution from a user perspective is to withdraw bitcoins as soon as you bought it, never leave a satoshi on the exchange, but I think many of them just left their coins/money on the exchange due to old habit in stock/commodity trading

+1

Fractional reserve banking is a scam, all financial exchanges or places of businesses should operate purely on a 1:1 ratio of whatever they hold and what is represented digitally.

An exchange going for transparency could perform and display real time btc holdings data to its users.  Or at least a daily audit of crypto holdings.  This wouldn't stop other exchanges from practicing fractional reserve but it would give us a choice when we are choosing which exchange to use.

Actually I don't really know how stock exchanges are regulated. For example, could a stock exchange create fictive stocks and short them to crash the market? I think they can not, there might be some kind of third party auditor holding all their stocks so that they could not create stocks out of thin air by using FRB, they can only request deposit or withdraw of equities from that auditor upon customer request

In bitcoin's case, the exchange are holding both fiat money and bitcoin, no one knows how much fiat/coins they indeed have, unless there is a panic withdraw, which is very seldom

Same as you claim banks are criminal enterprise, it does not stop them from using FRB and creating financial crisis

It's a criminal enterprise.