[cvick]

Actually, you can't. If I am in possession of 1 BTC and I give it to you, I am not in possession of it anymore -- there is nothing that I can do to get it back unless you give it back to me. There is absolutely no way to do fractional reserve lending with BTC because you can't 'lend' someone BTC -- it's either mine or it's yours. period.

Fractional reserve lending "backed" by BTC is possible, but then, you're not actually lending BTC - you're lending something that is "not BTC" - namely, a promise to pay BTC on demand, which is no different than fractional reserve lending that was backed by gold in the past (or, as it is today, lending that is backed by the value of the thing that is being lent - fiat currency).

The problem is that you can't think of BTC like a traditional currency because it isn't. Because it is digital in nature, it can act very much (almost exactly) like a modern currency, but when all is said and done, what you are left with is something that is much more like a commodity than actual currency.

Coinbase is free to do their internal accounting in any way that they wish as long as the numbers come out 'correct' on the balance sheet, but if I deposit BTC with them and then subsequently use that BTC to purchase goods and services, actual bitcoin will be transferred from me (via coinbase) to the merchant. The merchant receives actual bitcoin as a result of that transaction, not a promise to pay bitcoin at some point in the future. This is not fractional lending.

Banks are legally allowed to issue credit up to a specified multiple of their reserves, so, extending your analogy above, imagine an additional eight people behind you requesting to overdraft their account by $100. As a result of your $100 deposit, the bank is now legally authorized to approve each of those requests for a total of $900 in credit that was created out of nowhere. In point of fact, however, the bank can't just create money out of thin air. In order to extend this credit, they must have a reasonable expectation that the loan will be paid back - to act otherwise would have negative effects on the economy and the bank itself.

You just can't do that with BTC, and, in my opinion, that is not a limitation, but a very positive aspect of bitcoin - it doesn't fit into the current economic model.

[dragonwriter]

> Actually, you can't. If I am in possession of 1 BTC and I give it to you, I am not in possession of it anymore -- there is nothing that I can do to get it back unless you give it back to me. There is absolutely no way to do fractional reserve lending with BTC because you can't 'lend' someone BTC -- it's either mine or it's yours. period.

You may have a good grasp of BTC, but you seem to have misunderstood lending and banking quite badly. Lending doesn't mean two people have the same money. Lending is when the lender takes money that they have, and give it in the borrower in return for a future claim of money from the borrower.

The fact that only one person can have a given BTC -- the same is true of, say, gold coins -- doesn't prevent fractional reserve banking with BTC (or gold coins.)

> Banks are legally allowed to issue credit up to a specified multiple of their reserves, so, extending your analogy above, imagine an additional eight people behind you requesting to overdraft their account by $100. As a result of your $100 deposit, the bank is now legally authorized to approve each of those requests for a total of $900 in credit that was created out of nowhere.

Er, no. Assuming the 9x multiple you seem to be assuming, and assuming that the bank was already at its limit when you made your $100 deposit, the bank would be legally permitted to honor only $90 in overdrafts from your deposit -- not $100, and certainly not $900 -- as they would need to retain the remaining $10 as the additional reserves to cover the $90 lent out for the overdrafts.

This does increase a measure of the money supply that includes both actual cash in people's hands and depository accounts, because now you have the $100 on account, and someone else has $90 they've borrowed (which they might deposit in a bank that could then keep $9 and lend out $81, etc.)

But it doesn't require the bank to magically create dollars to loan out that didn't exist before (the created money is the account balances that aren't fully covered by reserves.)

> You just can't do that with BTC,

You can do it with BTC, gold coins, etc., exactly as much as you can do it with dollars.

[adrianmacneil]

> Banks are legally allowed to issue credit up to a specified multiple of their reserves, so, extending your analogy above, imagine an additional eight people behind you requesting to overdraft their account by $100. As a result of your $100 deposit, the bank is now legally authorized to approve each of those requests for a total of $900 in credit that was created out of nowhere.

That's not exactly how fractional reserve banking works. Banks can lend out a multiple of the reserves they hold, but they can't lend out more than their total cash on hand. If $100 was all our hypothetical bank contained, then it could only lend out $90 of it, not $900.

The exact same thing could be done with Bitcoin. If you put it in a bank, they could lend this out to another party (and use future deposits to pay you back if you tried to withdraw your BTC).

[cvick]

Technically, you are correct: a single bank cannot do this, but the entire banking system can. With a 10% reserve requirement, a single $100 deposit at one bank becomes $1,000 of credit in the entire banking system.

However, the point that I am trying to make is that you cannot do that with bitcoin because you cannot lend out BTC that you do not have. If you start out with 100 BTC, you can never increase that amount by any kind of fractional reserve lending - there will only ever be 100 BTC.

The idea of "BTC credit" expressed as actual BTC makes no sense -- 1 BTC is 1 BTC it is the thing that is used for trade. If you want to create a new kind of currency that is backed by bitcoin and start a bank that uses that currency for fractional lending, then there is nothing to stop you, but you would have to operate in something other than actual BTC for credit - using actual BTC for that just won't work, as you'll quickly run out of any BTC that you had after only a few transactions/loans.