[icebraining]

I'm probably missing something, but why can't Bitcoin work that way? Say I deposit 10 BTC in Coinbase, which records that as a liability in their books, and then they lend out 8 BTC to someone else. Isn't that the definition of fractional reserve banking?

[Jtsummers]

Fractional reserve banking effectively creates more money. Assume you have to keep 20% available, you can lend out 80% of your deposits. You lend that out, but your depositors still have access to "spend" their money, so you've increased the money supply by 80%. Now suppose the borrowors repeat this process at a second bank, and that bank loans out 80% of their deposit, we now have 164% extra money in the system, all available for spending.

If you try the same with BTC, it's not possible. You give me 10BTC to hold, I loan out 8 BTC, you can't spend from your 10 anymore (well, 8 of it). The total currency in the system is unchanged, just who can use it has changed.

[icebraining]

You lend that out, but your depositors still have access to "spend" their money

They have access to their money because the bank keeps a reserve that is enough for covering regular activity, but if the depositors as a whole tried to withdraw more than that, the bank can't simply invent USD with which to pay its depositors. That's why banks default when there's a run.

And of course, Bitcoin banks could also keep a reserve of BTC, so I really don't see why you can't have fractional reserve banking with Bitcoin.

[Jtsummers]

Only partial for that reason. If everyone demanded all their money, yes, it would break the bank. But if 30% of the money were requested, and only 20% were held in reserve, the bank can still act as if it has the money. There's no similar mechanism for bitcoins.

[icebraining]

Sure, but that doesn't mean that new money can't be created with a Bitcoin-based fractional reserve banking system, it just means they wouldn't have a central bank acting as a lender of last resort - though they could still get loans from other banks.

[Jtsummers]

I guess my point is, under the system present in the US and (to my understanding) many or most other countries, you have more dollars floating around than there actually are, a fair chunk is technically non-existent, but still used in transactions.

With bitcoin, unless you're using bitcoin as the backing for another system, you don't have excess floating about. If there are 100BTC in the world, the system doesn't allow the ledger for all bitcoin addresses to sum up to anything over 100BTC. This breaks, for better or worse, the lending model that fractional reserve banking depends on. Now, if BTC is treated like a commodity and is the backing of some other currency (like gold used to be), then that other currency could be used in an economic system that uses fractional reserve banking.

[icebraining]

But my point is that the system doesn't have to support it, you can have "technically non-existent" Bitcoins like you have technically non-existent dollars. The bank can just tell you in your balance that you have Ƀ30 without actually having them according to the ledger.