Take the 2-minute tour ×
Bitcoin Stack Exchange is a question and answer site for Bitcoin crypto-currency enthusiasts. It's 100% free, no registration required.

There are topics about the possibility of e-wallet providers operating like fractional reserve banking. How it can be done in theory and practice? Did it ever happen on any meaningful way in Bitcoin's short history?

Edit: does this practice involve any real lending of bitcoins just like the case with real banking:

Edit 2: is it a prerequisite for e-wallet operators that they store all clients' funds on a shared bitcoin address or is it only an added benefit for them?

share|improve this question
    
Not sure why this was downvoted; this is a great question! I've voted it back up to 0. –  Highly Irregular Apr 5 '13 at 4:19
add comment

1 Answer 1

It is pretty simple. Persons A, B, and C store 10 BTC each with you, so you have 30BTC. You figure on any day you need 10BTC handy for all of the transactions of ABC. That leaves you with 20BTC to spend, and assuming they all don't come asking for it at the same time, you are fine.

When doing this, you need them to send you the BTC, and you keep a record of their account in a database. Transactions between them just update their db records (not the blockchain). Only when they withdraw or pay out to someone not in your system do you need to spend the money in your reserves.

Looking at mtgox, they could easily do this; the record of the coins that are yours is not what is in some address, but just what is in their db. Since they hold a huge amount of coins for a huge amount of users, it is unlikely that all of their coins will ever be withdrawn. In fact, many users may be dead or no longer interested in bitcoin or simply forgot their login. All of the bitcoins belonging to those users in essence will never be withdrawn, and mtgox can get away with spending them without worry. Using login statistics (which I am sure they have) they can probably make a guesstimate about the amount of their reserves will never be collected, and so they can spend at will.

I am not saying that mtgox is engaging in this (heck they probably make more money off of fees), but it would be so simple and totally invisible to anyone who cares.

Frational reserve banking is super easy and it just relies on a lack of transparency in addresses assigned to users with actual btc in them.

Interestingly this can make it so there are in some ways more bitcoins in circulation than in existence, as trading with db bitcoins is basically equivalent to real ones.

share|improve this answer
    
I edited my question. Let's say no user died, forgot their passwords or not interested in bitcoin any more. So the operator is still owing BTC 30, even if he has on hand only 10. The question is did he really spend the other 20? Or perhaps lent it out like real bankers fractional reserve? Yeah, there are some bitcoin lending operations out there but I guess it's still minor or murky. –  superuser Jan 12 '13 at 17:51
    
Edited my post again: is it a prerequisite for e-wallet operators that they store all clients' funds on a shared bitcoin address or is it only an added benefit for them? –  superuser Jan 12 '13 at 18:22
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.