From time to time, you hear that bitcoin cannot become a real currency because an electronic currency cannot be used in fractional banking. However, this is simply not true. Imagine that a bitcoin bank is setup to take deposits and say 100 bitcoin users decide to use the bank, collectively depositing 100,000 bitcoins.
Now there are 100,000 bitcoins available to be loaned out. The loan is made by simply creating bitcoin deposits in the accounts of the borrowers or by transferring them to bitcoin borrowers. If a requirement of borrowing is being a member of the bank the wire transfer is not even necessary, it can all be done on site. Transfers only become necessary when borrowers or depositors draw down their accounts.
The amount that can be loaned would depend on expected liquidity needs based on withdrawals of depositors in relation to time. The amount held in reserve would depend on the daily needs of depositors and the remainder can be lent. If 90,000 bitcoins were loaned out then the bank would have 190,000 bitcoins on its accounts even though only 10,000 actually exist. The bank has created 90,000, plus interest, bitcoins in value that it will receive over time. The 10,000 bitcoins will cover the bank’s daily activity of depositors.
This is exactly the way a typical bank works but they also make a significant amount of dollars in fees they charge you for using your money. The absence of fees and other charges banks impose on their depositors and borrowers is one attraction of bitcoins. Although it may seem unrealistic at this point in time, the theory is sound and it is fractional reserve banking.
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