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Any Ripple gateway that establishes a solid reputation will be tempted to switch to fractional reserve issuance of its own IOUs to increase leverage (which is exactly what the existing comercial banks do).

Question:

Can Ripple gateways' accounting be fully transparent since presumably all their transactions are stored in the distributed public ledger ? (This is similar to how SatoshiDice operates currently).

However it's not clear if external deposits and distributions can be represented in the ledger.

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For currency in the form of Ripple IOUs, yes. Anyone can tell at any time the total outstanding value of all IOUs in a given currency for a given issuer. So a gateway could, if it wished to, provide provable reserves relative to its outstanding IOUs.

However, gateways typically also hold fiat that's not in the form of IOUs. Gateways currently use a two-step deposit scheme -- you deposit currency in your gateway account and then you tell them to "withdraw" these funds as Ripple IOUs. The funds in the gateway account that haven't been withdrawn as IOUs are not visible. So there's no way to know what obligations a gateway has that aren't in the form of IOUs.

A gateway that wanted to operate in this form would probably wind up supporting only a one-step deposit and withdraw system. With this scheme, you specify the Ripple account the IOUs are to go to before you give them any currency and they issue IOUs as soon as the deposit clears. And for withdrawals, you specify where the currency is to go prior to returning the IOUs to the gateway.

I don't believe these one-step mechanisms are supported by any gateways yet.

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This kind of "one-step atomic" deposit and withdrawal scheme seems as a promising new use of Ripple to establish "provably trustworthy banks" but perhaps it precludes the use of leverage so they would be more like non-leveraged S&L's but with provably transparent accounting. Perhaps this type of use case required more formal description and support since until ripple such kind of banking system was probably impossible. –  Alex Kravets Feb 20 '13 at 8:58
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Only their XRP holdings, bitcoin holdings, devcoin holdings, namecoin holdings, barbequecoin holdings, ixcoin holdings etcetera etcetera etcetera come equipped naturally with public ledgers, so until the fiats come up with believable reliable public ledgers of their own full transparency seems likely to initially tend to be limited to XRP and the various blockchain-based currencies...

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Let the new round of unaudited fractional reserve banking begin ? Gentlemen, start your IOU presses ? –  Alex Kravets Feb 16 '13 at 21:38
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