Bitcoin as legal tender

Great Debates
163

How a bank would actually loan it out would be essentially unchanged. There is no intrinsic property to a dollar bill that says that it is loaned out, and actually belongs to another entity. There does not need to be anything about BTC that would either.

Bank loans out currency, and you sign a contract dictating the terms that you pay it back. There does not need to be any sort of record keeping in the blockchain to handle that.

That’s exactly what happens with dollars being loaned out.

So, we try to fix the lack of flexibility in BTC with something with even less? The gold standard was abandoned for good reason.

That’s how it works with dollars.

I think that this has been said a few times in this thread, but that’s not how fractional reserve banking works.

You don’t get 10 dollars deposited, then loan out 100. You get 100 dollars deposited, then loan out 90.

Now, are you saying that if I deposit my BTC in a bank, they cannot loan out any part of it, that they have to keep it all on hand in case I want to withdrawal it? If so, then banking doesn’t work anymore, at all. They can’t make loans, and have no incentive to hold onto my deposit. If not, then you are not changing anything at all.

Paying interest on loans has the effective of reducing spending. That will be true no matter what kind of currency you use. However, using a currency that cannot grow with the economy means that you get deflation, which further reduces spending, as the value of your currency will be greater tomorrow than it is today.

164

The bank is loaning you money for (in effect) a fee of 10 BTC. The problem you pose is precisely the same problem as doing a day’s work and expecting to be paid 10 BTC at the end of it, or making a clay pot and expecting to be paid 10 BTC for it.

The person doing the borrowing/hiring/buying is going to have to earn some BTC to pay.

165

Pretty much all you said is wrong.
Read up on fractional reserve banking. Banks create money that does not exist. That will not work with Bitcoin.

166

If you murder someone you can posit that this wasn’t illegal in your own little fantasy world. Yes, the police can “externally game the system” by taking you away in handcuffs, charging you, taking you to court, getting a guilty plea and physically putting you in jail. But in your own little fantasy world, what you did wasn’t illegal.

You are howling at a hurricane. What bitcoin was or wasn’t designed to do doesn’t mean jack shit. It’s not a person. It’s not a company. It’s not a government. It has no rights and no powers. The legal system will do to it and with it what the legal system will do. You have been told what the legal system will do to it. Ignoring the reality of that because you want something else means precisely zip.

167

Every single thing k9bfriender said was right, for reasons that have been explained to you over and over. You just ignore the careful explanations of why you are wrong, and carry on regardless.

168

Forget it, Princhester. It’s China town

169

Well, no it is not, but I don’t think that you will be convinced no matter what, so whatever. I’ve yet to meet a BTC advocate that was willing to actually understand how the money supply works.

I have done so, so have several other people in this thread that have said that you were wrong on your understanding of how it works.

While fractional reserve banking does increase the money supply, it does not do so by the method you keep incorrectly repeating.

In a way, they do. They take your $100, and loan out $90. You still own that $100, and now there is another $90 out there. So, sure, the total money supply has increased. But that is why that $100 is considered a liability on the bank’s sheets, to balance that out. But, as long as that loan is out there, then the bank can’t loan out more, and you can’t get your money back. (Assuming that you are the only depositor in this example bank, of course, the whole reason that fractional reserve banking works is the fungibility of dollars, and that I don’t mind taking the dollars that my neighbor deposited, so that wouldn’t be a “real life” example.) So the actual available money supply has not actually increased.

But, that will either be the case with Bitcoin, and work pretty much exactly the same way, or, if your intent is to remove fractional reserve banking, then there are no more loans or deposit accounts.

You don’t want to defeat inflation. What is it about inflation that needs to be “defeated”? It would be nice if there was no inflation or deflation, but a growing and changing economy means that balancing that is pretty much impossible. A little bit of inflation is fine, doesn’t hurt the economy at all. A little bit of deflation can be disastrous. So, our economic policies are set to try to have around a 2% ish rate of inflation. That is low enough that it keeps the economy healthy, but high enough that fluctuations in the economy are unlikely to delve into deflation.

If the money supply can’t grow, then neither can the economy. Preventing the growth of the money supply is a terrible idea, and since it is the underpinning idea behind your proposal, it makes your proposal a terrible idea. It either doesn’t work and is a waste of time, or it does work, and destroys the economy.

170

Please don’t say this. You will confuse Kedikat more.

You do not still own that $100. You own a debt for $100, owed by the bank.

171

Fair enough, that is more precise than what I said, and more correct.

172

Good advice I will take once I get bored! :grin:

173

Oh, and if you wonder what’s wrong with deflation, it’s pretty much entirely psychological.

Most people would rather get a raise every year to keep up with inflation than a paycut every year to keep up with deflation, even if their purchasing power remains unchanged.

Also, if I know that something will cost more tomorrow than today, then I have no reason to hoard my money in my mattress, as I am losing money by doing so. If things cost less tomorrow than today, and I am going to be making less money tomorrow than today, then I’m going to stuff my mattress full.

So, sure, take people out of the whole equation, and you could certainly run an economy on BTC. But then, who are you running if for?

174

One more time.
In the current system of U.S. dollars and U.S. banks as an example.
If I have $1000 dollars in an account at a bank. That bank can now make a loan to someone else based on some portion of that $1000 dollars.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
But lets say the reserve ratio was not zero.
Say the bank can now lend out $100 dollars because I have $1000 dollars on account there.
I have $1000 dollars. And now someone else has $100 more dollars. I can withdraw my $1000 dollars and have it in my pocket. The borrower also has $100 dollars in their pocket. We can go spend that money. With a few keystrokes and a signature on some document, $100 more dollars are now in circulation. The fractional reserve system just created $100 dollars. The dollars were not printed. But $100 dollars more purchasing digits now exist. No work was done, but $100 dollars worth of work can now be bought. At some future date, hopefully the $100 dollars will actually produce some useful work.
In a Bitcoin only world.
I deposit 1000 BTC in the bank. If the bank decides it still wants to use the fractional reserve system, it loans 100 BTC to some one else. As I am specifying. The bank is still trying to use the current concept of loans. So it tries to create some new BTC with a few keystrokes. Nope. Can’t create real BTC that way. It has to either already exist or be mined. But this is in the BTC future. All the BTC that can exist is already in existence. So the bank tries to pull a fast one. They take 100 BTC from my account and loan it out. Okay. The person leaves with 100 BTC. I come in and withdraw all of my 1000 BTC. Ooops. Now the bank has to find an extra 100 BTC to give to me. They cannot create an extra 100 BTC. They have to take it from someone else. Or take it from actual reserves that they have. But they don’t have the reserves. In BTC world a bank would have to have a huge reserve.
Can we just pretend there is an extra 100 BTC created? Only if you never try to spend it. The BTC blockchain system will not know about the pretend BTC.
And that is it for me on this.
Few people realize how the banking and other financial systems actually work. And don’t work.
A few have seen the problems with BTC versus current banking and other financial systems. I don’t see how to make it work. Haven’t heard any viable ideas as to how it might.

175

There’s your problem. Your initial premise is that the bank can loan out $100 because you deposited $1000, and that you can then take it out. If you are the only depositor, then no, you cannot take it back out.

The reason that in real life, you can deposit $1000 one day, and withdrawal it the next, is because most people don’t do that, and they can cover the withdrawals with the money that other people are leaving in the bank.

Only because the bank has the balance of that loan as a liability. A good way to think about it is that when you deposit money into the bank, you are actually destroying that money, and the bank is going into debt to you. The money that is created by loaning is only possible because of the money destroyed by depositing.

You have a fundamentally flawed understanding of the “current concept of loans”. It does not create more money when it loans it out, it loans out the money that you deposited in it. It cannot create money that it doesn’t already have.

That is exactly how it works with dollars. It’s not a “fast one”, it’s the entire basis of the banking industry.

They give you the bitcoin that your neighbor deposited.

Taking it from someone else is exactly the reserves that they have.

Right, their reserves are based on the fact that most people put their money in the bank, and leave it there. The reserve currency would be exactly the same. If you are simply looking to increase the reserve fraction required for banks to hold, you don’t have to go to BTC to do that, you just have to convince the heads of the Federal Reserve Banks to make that decision.

And if BTC were the currency of choice, then that would be no different. Banks would be required to hold a reserve that is deemed an acceptable level to pay off a reasonable number of depositors wanting their money at once.

Now, one of the nice things about a fiat currency that is backed by the government, and deposit accounts that are insured by the government, is that if there is a bank run that makes a bank insolvent, the depositors are still made whole (up to the FDIC insurance limit, anyway). The government can step in and print or create money in order to shore up holes in the money supply. Whether that should be done in a particular situation is a whole different debate, but removing that option from the table entirely makes the economy far less stable. It’s less stable because there is no control over it, and it is less stable because people know there’s not control over it, and therefore have less confidence in it, and the economy is all about confidence.

That’s not how it would work, as explained many times.

Yes, I’ve learned that. And those people also refuse to learn even when how it works is patiently explained to them.

That’s because it wouldn’t.

BTC is an investment into a bubble, a speculation, a toy of the wealthy, and a funnel for criminal activity. It is not something upon which a healthy economy can be built.

176

First of all, just to be pedantic, it’s “$1000,” not “$1000 dollars.”

You can only withdraw that money if someone else has deposited money in the bank, or else the bank will be bankrupt. They can’t hand out $1100 in cash if they only had $1000 to begin with. Banks don’t print money.

Think, for a moment, about what would happen if banks could literally create money they had no basis for. Logically, the bank should immediately loan someone one quadrillion dollars, on a one hour term with -1% interest. The bank will make a $990 trillion profit in an hour. Why do you think they don’t do that? Why would they EVER run a credit check on you?

No, you don’t. When you deposit $1000 in the bank, you do NOT have $1000. The bank does. What you have is a promise from the bank to give you a thousand dollars if you ask for it.

I realize we think of money we have in the bank as money we possess, but we really don’t. Right now my checking account has $2931 in it. That is money the BANK has, not me. What I have is a promise the bank will give it to me if I ask for it back.

177

Have you lot discussed and agreed upon whether or not the transfers involved in BTC loans are recorded on the block chain or not?

If they are, there are more problems here than Kedikat’s misunderstandings about fractional reserve banking and irrational fear of inflation. (Though to be fair, the latter is an inherent trait in most goldbugs, whether they are into real or technological gold.) BTC just doesn’t scale to allow the velocity of money the world has now, so any real “BTC future” will need to involve some sort of institution “selling and buying” BTC they hold, without recording a block chain transaction for most transactions. And whoops, there goes “decentralized” and “controlled by no one” out the window.

And if they aren’t recorded on the chain, they’ll just be like private banks holding gold reserves and handing out paper money with a right to withdraw some, just like banks of old.

And some of Kedikat’s warnings are 100s of years old as well. I see they are worried about runs on the bank, but I’m baffled how they have never heard of those and knows so little about how they are prevented (or not) today.

178

Yes (that they don’t have to be) and repeatedly.

There’s a fundamental lack of understanding of money and banking, and it has gotten to the point where it is apparently hoped repetition will do the job where thoroughness has failed.

179

I think I see the problem. You’re thinking of Bitcoin as the only currency. Nobody else does. There is always another currency, and it can’t be gold because gold is not a currency.

Bitcoin is not a thing, it is an equivalency. You approached that in your middle section. An equivalency is a currency and can be handled like one. The form doesn’t matter. A currency can be sheep and goats. Those are limited in number and can’t be divided but the strictures of banking can still be applied.

Start with the chain nature of fractional banking.

Aaron deposits 1000 BTC.
The bank lends 900 to Bill.
Carrie deposits 900 BTC.
The bank lends 810 to Dave.

Again, a Bitcoin is not a thing. No bank will ever lend 900 BTC. That is as impossible as a bank lending 900 golds. A gold has no meaning or value. Only an amount of gold pegged to a value has meaning.

Therefore the bank will always - and can only - make a contract to lend the current equivalent value of 900 BTC. When Bill has to pay off his loan he pays off the then current equivalent value of 900 BTC (ignoring interest). If Bitcoin goes up by ten times in the interval he can pay off the loan with 90 BTC. If it goes down ten times he has to pay 9000 BTC. If it goes up 1,000,000 times he pays off 0.0009 BTC. That’s why the divisibility of BTC makes the finite nature irrelevant. A Bitcoin always has to be pegged against some other value. As long as everyone has a common agreement of what the equivalency is, the form of the transfer is irrelevant.

The chain is misleading in another way. Here’s the better explanation.

As an illustration, assume we create a brand-new economy and you add the first $1,000 to the system.

  • You deposit $1,000 into a bank account. The system now has $1,000.*
  • The bank can lend 90% of your deposit, or $900, to its other customers.*
  • Those customers borrow the full $900, and you still have $1,000 in your account, so the system has $1,900.*
  • Customers spend the $900 they borrowed, and the recipients of that money deposit $900 into their bank.*
  • That bank can lend out 90%, or $810, of the new $900 deposit.*
  • Customers borrow the $810. You still have $1,000 in your account, and the recipients of the first $900 still have that money available in their accounts. So the system now has $2,710 ($1,000 + $900 + $810).*
  • The cycle, known as the money multiplier, continues.*

Is there a difference if the loan is denominated in Bitcoin? Not really. Maybe the ownership of the Bitcoin is transferred electronically, but that’s done now in dollars. What if every depositor came for their Bitcoin at once? Same thing that happens in dollars. Either the bank successfully recalls all its loans or it goes under. Banking works as long as there is a common currency that defines value. Bitcoin is a currency whose value is defined against the dollar. Bitcoin cannot be defined against itself; that’s meaningless.

As you’ve already been told, this is the exact opposite of how fractional banking works.

180

My favorite description of Bitcoin: Imagine if you could have your idling car produce solved sudoku’s which could only be traded for heroin.

181

Bitcoin could become a legal tender of a nation, and be backed by the faith and credit of that nation, but it would be a stupid nation to do so, soon to be a bankrupt and collapsed nation.

182

I have no doubt that blockchain technology and crypto currencies will play a greater role in the global financial system in the future.

But everyone I know who is really into crypto sounds like cross between a degenerate gambler, a day trader, and people who get sucked into Multi-Tier Marketing schemes (arguably the same thing).

It’s like people like @Kedikat read about the fractional reserve banking system and then are suddenly horrified that a dollar doesn’t represent a dollar’s worth of gold in some vault somewhere and that means it’s not “real”. What makes Bitcoin any more “real” than the US Dollar?

Or NFTs for that matter. What is it about a digital watermark that makes it potentially worth tens of millions of dollars? Nothing really. It’s a hobby for wealthy art enthusiasts. What prevents me from taking a screen grab of some NFT image and passing it off as my company logo? Nothing really, except that presumably the owner has the original digital asset and the NFT proves it’s theirs. But it still requires enforcement by some legal or regulatory body.

Bitcoin is supposed to solve all these “problems” by circumventing the banking system, but from what I see they create all these new ones for their owners by ignoring the reason we have banks in the first place. Having a secure, trusted place to store wealth. I don’t go broke if I forget the pin to my ATM card.