Note that some BTC enterprises today like Coinbase actually defer blockchain transactions when users are exchanging in their network. That way they can aggregate small transactions and enable temporary chargebacks. But that really is all a bank can do at most - delay doing the final transactions - because they have to commit them to the global blockchain or you never actually made a transaction.
An analogy would be walking into a bank and handing the teller $100. This money goes into the cash draw (analogous to a hot wallet). When the customer behind you asks to overdraft their account and withdraw $100, your note is handed to them, but your account balance remains at $100. Now you both have $100.
Coinbase does not "defer" or "aggregate" transactions between their customers. Most internal transactions are processed "off-blockchain", which simply means that ledger entries are being updated in the background and no actual Bitcoin is being transferred.
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.
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.
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).
MtGox operated as a fractional reserve for a while, and it failed due to two reasons:
- Instead of investing the bitcoins to debtors they "lost" them.
- The complete lack of deposit insurance ensured that a bank run happened as soon as doubts of their liquidity circulated.
If you manage to fix these two problems (the second being the harder one - you'd have to work with different exchanges/banks and make sure they are regulated so they don't all fail) fraction lending isn't a problem.
