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To be honest, I don't see how you could possibly do fractional reserve with Bitcoin. By definition fractional reserve is lending more currency than you have. Banks can do this because they are allowed to create the money that they lend. So if I am allowed a 10:1 ratio of lending and reserve, as long as I maintain $1 in my reserve, I'm allowed to lend $10. Those $10 are poofed into existence when the loan is created, though. As another person mentioned, I think you are confusing lending with reserve banking. A bank (or any entity) is allowed to lend as much money as they want to someone if they are actually lending money that they have. That's not fractional reserve. Fractional reserve creates money. The fraction limits how much money you are allowed to create. You can't do that with Bitcoin by design. Of course, you can lend money (that you have) with Bitcoin. There is currently no automated way to record that the transaction was a loan as opposed to a payment, but that's true of all currencies. In fact Bitcoin had some plans to implement contracts in the protocol, but I don't think anyone has done it yet. If I am to opine slightly, I think that Bitcoin's lack of ability to do fractional reserve is probably a mistake. I think it relegates it to a payment method as opposed to a viable currency. The problem with Bitcoin as a currency is the lack of availability. Although it often doesn't look like it, I think the purpose of a currency is to get resources into the hands of people who need resources, but don't have it. With Bitcoin, the currency is a limited resource and those that have it have no particular reason to spread it around. With a more traditional currency, the money supply can grow to match demand. The banks which create the currency have an incentive to loan money because the money that they are loaning is springing into existence at that time -- they aren't loaning their own money. The only thing the banks need to worry about is that on average, the growth produced by the loan is greater than the interest charged. Having a fluid money supply like this allows people who do not have money to get it and reduces inefficiencies (i.e. people being idle because they don't have the resources to produce something). Having said all that, I have no idea how you could implement fractional reserve in a distributed system and have any protection for horrible abuses. Until that problem is solved, I can't really see a way for this kind of currency to act as a true currency (as opposed to a payment method). If I remember correctly, there was a review of Bitcoin by a prominent economist a few years ago that pointed out this problem. |
> A bank (or any entity) is allowed to lend as much money as they want to someone if they are actually lending money that they have.
No they are not. There are supervisory limits on what a bank can lend (leverage ratios, capital adequacy rations etc.).
> By definition fractional reserve is lending more currency than you have.
No it is not, it is lending a fraction (less than 100%) of the money that has been deposited with you.
I think the confusion comes from that in todays banking system there are two sorts of money that seem very similar - the base money (federal bank notes) and the bank money (loans/deposits of federal bank notes). The loans/deposits can also be used as money but crucially they are NOT the underlying money even if it is very easy to convert one to the other (depositing or withdrawing the base money). Example: I can buy something with the fact that Chase bank owes me bank notes (with the loan I made to it), by changing the ownership of that loan to the shop I want to buy something from. I have a bank card that makes that transfer very simple.
The 10:1 ratio is a limit on bank money (loans / deposits) to base money (federal bank notes). Both sorts of money are denominated in dollars, but they are different and have different supply and demand.
To recap, by keeping careful records of the loans / deposits, and making systems to easily transfer ownership of the loans and deposits, these loans end up also having characteristics of money - they can be used for transactions, for accounting etc.
> You can't do that with Bitcoin by design
You absolutely can. The loans/deposits form of bank money could work with bitcoin as the base money, and you could have the same rules around fractional reserve, capital adequacy rules, liquidity ratio rules etc. that the normal banking system has.