How much of a potential issue is fractional reserve banking on Bitcoin? Are there any serious implications?
Will most new users over the next 10-20 years keep their bitcoin on an exchange, allowing borrowing and lending of the bitcoin behind the scenes, or will there be a sudden mass movement towards self custody of keys? What do you think will happen, and why?
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There will always be bitcoin banks. I'm using one right now ... I have sats that I've earned here on SN held on my account here on SN. While not technically a bank, there's nothing stopping me from using it as one.
Could SN be fractional reserve on account balances? Sure. Would I know? Not until people start claiming withdrawal stops working. And by then, it's too late.
I don't think I've ever had more than $5 or $10 worth of sats on my SN account though. Not because I don't trust the site, .. but because with Lightning I can withdraw with trivial fees, as soon as I have a chunk of sats anywhere that I don't plan to immediately use, I forward them to my main wallet, and periodically I might swap those on-chain to my cold storage wallet.
But signing devices (e.g., ColdCard, Trezor) keep getting better and better (and easier and easier). And who knows if governments do a 6102 on bitcoin held at exchanges / "banks" / custodians / etc. It will just be expected -- self-custody essentially crucially necesary, so that's what we do.
On a society level? Big issue. Only some of the advantages of a hard money translate into fractional reserve currencies. And there is a high risk that every day people will not bother to understand the technology and just go with a bank.
On a personal level? No issue at all. It does not prohibit you from having your own keys. You still have a permissionless and uncesnsorable hard money with only 12 words in your head.
It is not an issue. Of course we will get bitcoin banks, giving interest and lending btc to borrowers. Just like a normal bank. These banks might be a bit better than normal banks, in case they open their books (btc-addresses) for inspection.