Posted on 02/09/2014 4:00:24 PM PST by BfloGuy
Ever wonder what a digital bank run looks like? Nearly one million Mt. Gox users are finding out first hand.
The Tokyo-based exchange, popular amongst currency traders, has risen in prominence by offering its customers storage services in a variety of currencies. This effectively makes it act as an online bank. One such “currency” that it allows accounts to be denominated in is bitcoin.
Yesterday the exchange halted withdrawals of the digital currency, citing a technical malfunction. It promises to reopen for business on February 10th. What many news sources are missing is that this is not a particularly new development – the exchange has been rejecting customer withdrawals on-and-off for about two months.
What may be happening is a good old fashioned bank run. Like all banks, Mt. Gox is operating under a system of fractional reserves, loaning out or otherwise making use of bitcoin deposits entrusted to it. There are many more claims to the bitcoins depositors have with it than are actually in the digital “vault” at Mt. Gox. This is not unlike your bank, which has many more claims to each dollar deposited in it than it has dollars in the vault to honor. If too many people make a withdrawal at the same time, your bank has two options.
Option one is that everyone gets some small percentage of their original deposit. Option two is that only the first small percentage of people who get to the bank first get their whole deposit. Neither option looks very appetizing.
Mt. Gox has decided to use a method to stymie its own bank run which is not without precedent – it has halted redemptions. Of course, this policy was used widely by banks in many fractional-reserve regimes before the advent of deposit insurance, notably in Scotland.
In the Scottish fractional-reserve free banking experience, the option clause stated that a bank could halt redemption of a depositor’s funds, but would have to pay interest for this privilege. Besides the obvious rights violation of turning your deposit into a loan (but hey, at least they paid interest on it), the policy was also not able to stop banks from loaning out deposits until there was nearly a continual suspension of withdrawals. (At least, according to the expert on the period, Sydney Checkland.)
Mt. Gox has used this policy with a twist. Instead of promising your money back in the future with an added interest payment, it is “allowing” you to withdraw your bitcoin now by paying an additional fee.
Lest this post be misunderstood, this is not a fundamental problem of bitcoin, but one of fractional-reserve banking. Here we have an example of a purely unregulated currency succumbing to the same problems that have plagued money users for hundreds of years. When banks are allowed to function with fractional reserves, it matters not if the money is state-issued (like dollars) or market-created (like bitcoin), the outcome is the same: bank runs and depositors left with the inevitable losses.
But, of course, why wouldn't they?
ya know i dont think moochelles fat a** could be leveraged but i think it is worth giving NASA full funding to try
Potters not selling, he’s buying. Why? Because we’re panicking and he’s not.
lol....
Currency has value in direct opposition to how easily it can be manipulated.
Value determined by trust.
E-money....is little blips of electricity.like assigning value to individual Photons.
Lending out.
I wonder how fractional reserve lending works when there’s a blockchain showing each transaction. Anyone know?
Dunno about your question, but it sure makes it easy to tax the crap out of your money if they can categorize each transaction as a 'sale'.
as opposed to the electronic blips and magic scribbles on paper pushed by most go governements? gotcha
When you deposit bitcoin into a Bitcoin bank, the deposit transaction moves the bitcoin from the source address to an address controlled by the Bitcoin bank. The bank credits the bitcoin in their internal books to your bank account, but the bitcoin really belongs to the bank. Then the bank loans the bitcoin out to someone else (less the fractional reserve), which is another transaction on the blockchain (unless the borrower deposits the loan into an account at the same bank). I don't know of any Bitcoin bank (aka online wallet service) which gives out loans.
Going back to the original post, I think the blogger is making assumptions about Mt Gox functioning as a bank using fractional reserve banking. I've always understood fractional reserve in the context of loaning out bank funds, and as far as I know, Mt Gox does not have any loan programs. Perhaps someone could educate me if there is a broader meaning for fractional reserve banking (maybe investing some of the funds in other assests would be included?).
Mt Gox claims that its problems with bitcoin withdrawals is the result of a programming problem which was uncovered when the Bitcoin reference software was updated recently. The update included implementation of certain protocol features that the Mt Gox software was not treating correctly. (Mt Gox operates on their own implementation of the Bitcoin protocol.)
Mt Gox has additional woes from the seizing of some five million dollars by the US government for operating as a money transmitting service without licensing. I suppose its possible that Mt Gox sold some of its bitcoin funds to cover the seized funds. But that would be pure speculation.
Agreed....most of the paper is now over represented...some suggest 50-100 times......more little electronic blips...ripe for manipulation......human nature.
oh well
Ping
Good point. And eventually all the garlic-eaters will be his tenants in Potterville because of it.
Lending out.
What's your point? "Loan" and "lend" are synonyms. It's true that in the late 19th century, using "loan" as a verb was frowned upon, but that's since been dismissed as Victorian fussiness.
Loan and lend are not synonyms. They are two different parts of speech. Loan is a noun. Lend is a verb. That is how the language works.
Hey, it's English. The parts of speech are malleable. Woe to us for that, I admit.
No. Grammar is simply not taught in the public schools any more because teaching grammar is deemed as being disrespectful of the “natural language” of Negroes. Bad grammar in writing simply makes the writer appear to be uneducated and less likely to actually know what he is writing about.
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