{"id":7846,"date":"2022-07-28T12:00:00","date_gmt":"2022-07-28T12:00:00","guid":{"rendered":"http:\/\/ci02a74379c00024eb"},"modified":"2025-10-01T12:21:44","modified_gmt":"2025-10-01T17:21:44","slug":"future-of-lending-bitcoin-full-reserve","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/markets\/future-of-lending-bitcoin-full-reserve","title":{"rendered":"In Defense Of Bitcoin Full Reserve: Not Anti-Credit, But Anti-Fiduciary Media"},"content":{"rendered":"
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\u200b\u200bThis is an opinion editorial by Stephan Livera, host of the \u201cStephan Livera Podcast\u201d and managing director of Swan Bitcoin International.<\/em><\/p>\n

The debate rages on about what the proper roles of bitcoin, \u201ccrypto\u201d and lending should be. What kind of credit should we have, if any? What is fiduciary media and do we need it? Or should it all be fully reserved? <\/p>\n

In this article I will spell out some thoughts on this long-running debate and how it applies in a Bitcoin context. <\/p>\n

The Short Version<\/h2>\n

For the impatient, the short answer is: We don\u2019t need fractional-reserved fiduciary media for credit and commerce to exist in society. You can have commodity credit <\/em>in a full-reserve banking system, it merely stops circulation credit<\/em> and the creation of fiduciary media<\/em>. The defense of \u201cfree\u201d fractional-reserve banking amounts to a kind of special pleading, inflationist stance. This does not preclude the fact that there will be many who try <\/em>to commit fractional-reserve banking fraud, but \u201cthe market\u201d does not necessarily have to serve this demand, nor is it beneficial to society. <\/p>\n

The Long Version<\/h2>\n

What Are The Key Sides Of This Debate?<\/h2>\n

Those who take the Rothbardian<\/a> full-reserve view are generally arguing that: <\/p>\n

    \n
  1. Fractional-reserve banking is fraud<\/li>\n
  2. Fractional-reserve banking causes financial instability, this being due to malinvestment driving what\u2019s known as Austrian business cycle theory<\/a><\/li>\n<\/ol>\n

    Now, some in the full reserve camp will downplay or skip over the first point around fraud, as they believe that even if we disregard the fraud argument, there are still negative economic consequences in a society that tolerates fractional-reserve banking. <\/p>\n

    Austrian economists in the full-reserve camp include Ludwig von Mises, Murray Rothbard, Jes\u00fas Huerta de Soto, Hans-Hermann Hoppe, Joseph T. Salerno, J\u00f6rg Guido H\u00fclsmann, Philipp Bagus, David Howden and Robert P. Murphy. This camp would generally believe that reserve ratios of banks should and\/or would remain at or near 100%. <\/p>\n

    Those who take the \u201cfree banking\u201d view generally argue that \u201cfree market, fractional-reserve\u201d banking regimes can be laissez-faire<\/em>, and work in a stable way. They believe that bank reserve ratios could sustainably operate in the 2% to 5% range. There may be some bank failures but \u201cfree bankers\u201d may put this down to bad government regulation. Well-known economists and proponents here include Larry White and George Selgin. <\/p>\n

    What Is Commodity Credit And What Is Circulation Credit?<\/h2>\n

    As Mises spells out in \u201cHuman Action<\/a>,\u201d commodity credit <\/em>is the kind permissible under a full-reserve system. It means banks are lending out their own funds or the funds entrusted to the banks by customers. <\/p>\n

    Imagine for a moment that a bank had 100 gold ounces in its vault. And it issues out paper tickets, each representing one gold ounce, for the community to trade around in place of carrying around the gold (and verifying it and measuring it, etc). So long as the bank only issues out up to 100 paper tickets, there is no fiduciary media. One customer could come and deposit five tickets with the understanding that they are relinquishing control for a given time period. The bank could loan those five tickets out to another customer, and this would be consistent with commodity credit. <\/p>\n

    Now, imagine that bank issued out 150 paper tickets (each purporting to represent an ounce of gold), but it only had 100 gold ounces in the vault. In this situation, we have a creation of fiduciary media. <\/em>Those additional 50 tickets (above and beyond the genuine 100) represent claims to gold ounces that literally do not exist. <\/p>\n

    Banks creating loans and credit by issuing fiduciary media are granting circulation credit<\/em>. This is what the Misesian and Rothbardian Bitcoiners are objecting to. We generally argue that a system of fractional reserve banking is only sustainable with government intervention, typically a central bank lender of last resort, or with government granted permission for banks to not grant in-specie<\/em> redemption (i.e., not letting customers withdraw their coins). <\/p>\n

    How Long Has This Debate Been Going? <\/h2>\n

    In a sense, this debate has raged for hundreds of years and even predates the Austrian school of economics. This debate has gone on between the currency school and the banking school. The currency school were some of the OG hard money men who wanted a full-reserve banking system. They even managed to put in the Bank Charter Ac<\/a>t (aka, Peel Act) in the U.K. in 1844, which did mandate 100% reserves for bank note issuance, however, as they did not also mandate 100% reserves on bank demand deposits, the system of fractional-reserve banking still survived. The Peel Act was later suspended. <\/p>\n

    In terms of the full-reserve Austrians and the \u201cfree bankers,\u201d most of this debate took place in the 1990s, but there have been occasional volleys back and forth even in recent years. Notably, George Selgin and Murphy debated this topic in 2018<\/a>. Stephan Kinsella has a reading list post here<\/a> for those interested. Also of interest will be this Kristoffer Hansen post at Mises.org, \u201cUnderstanding The Rothbardian Critique Of Free Banking<\/a>.\u201d I can\u2019t hope to cover every possible aspect of this debate in one post but I will attempt to summarize and respond to key points.<\/p>\n

    So, What\u2019s The Claim With This Recent \u2018Crypto\u2019 Credit Crunch? <\/h2>\n

    Recently, Nic Carter has asserted that this recent \u201ccrypto\u201d credit crunch is not the end of crypto lending. He is defending credit and the \u201cfree banker\u201d position with some historical parallels to what happened recently with lenders, such as Celsius<\/a>. <\/p>\n

    Point-By-Point Disagreements With Carter<\/h2>\n

    Carter mentions:<\/p>\n

    \u201cToday, bitcoiners are gleeful about the collapse of credit in the crypto industry.\u201d<\/p>\n

    More like, there were Bitcoiners cautioning against high-risk platforms and encouraging self custody. Sometimes, people have to point to recent examples to teach their lesson. Just like how, after the fall of Mt. Gox<\/a> or QuadrigaCX<\/a>, it became a lot easier to sell the message of self custody. <\/p>\n

    Carter comments:<\/p>\n

    \u201cThey often follow a Rothbardian<\/a> ideal, believing fractional reserve banking to be \u2018fraud<\/a>,\u2019 even though the idealized \u2018full reserve banking\u2019 generally never emerges in free market conditions.\u201d<\/p>\n

    So, as mentioned above, yes I do believe fractional-reserve banking is fraud, but no, I disagree with what Carter is implying here. Fractional-reserve banking has had the backing of the State, and therefore this outcome we\u2019re living in today was a result of political <\/em>entrepreneurship, rather than genuine free market entrepreneurship. <\/p>\n

    When the government puts in central bankers, lenders of last resort, and provides special privileges to bankers e.g., allowing them to deny in-specie redemption to customers and deposit insurance, this gives an artificial privilege that would not exist under a genuinely free market. H\u00fclsmann has written a paper on this idea titled \u201cHas Fractional-Reserve Banking Really Passed The Market Test?\u201d<\/a> For example, see this section by H\u00fclsmann: <\/p>\n

    \u201cThe banker turned fraud who issues the first uncovered money title is in fact a \u2018political entrepreneur.\u2019 He \u2018tests the market\u2019 to discover how far he can go in violating property rights without encountering resistance.\u201d<\/p>\n

    See also this interesting section by H\u00fclsmann: <\/p>\n

    \u201cA large number of fractional-reserve banks, to say the least, have used such words intentionally in two mutually exclusive senses and that this usage has concealed underlying real differences. These banks\u2019 customers were led to believe that they had bought a financial product of type A, but in legal settlements they were told that they actually had bought a product of type B.\u201d<\/p>\n

    Doesn\u2019t this sound familiar with what\u2019s happening to Celsius customers? See this<\/a> analysis from a business restructuring lawyer, for instance:<\/p>\n

    \n

    \u201cCelsius has set the stage for conflict between its customers and its sophisticated institutional creditors \u2014 in particular, Celsius has pointed out in its pleadings that customers transferred ownership of crypto assets to Celsius, making those customers unsecured creditors. This detail may undercut customer expectations, who thought they were depositing their assets into a construct similar to a traditional bank.\u201d<\/p>\n<\/blockquote>\n

    And see this video clip compilation<\/a> of Celsius Network videos where CEO Alex Mashinsky is asserting that \u201cCelsius is a safe place to store your coins\u201d and that \u201ca run on a bank cannot happen at Celsius because Celsius never lends more than what it has.\u201d <\/p>\n

    For clarity here, Celsius may not have been running a fractional reserve banking operation. Instead, it may have been a poorly-run financial intermediary, which possibly degenerated into a ponzi scheme (at least that\u2019s what is being alleged in this court case<\/a>). Business and bank failures are a fact of life, whether we live in a full-reserve or fractional-reserve banking world. <\/p>\n

    Carter claims: <\/p>\n

    \u201cDuring Scottish \u2018free banking,\u2019 a fully laissez-faire, markets-based system, reserve ratios were commonly 2-5%, and the system worked swimmingly.\u201d<\/p>\n

    Not so fast! There were entire stretches of time where some of these so-called \u201cfree market\u201d free bankers were permitted to not redeem in specie (i.e., they could freeze customer withdrawals), while at the same time, still enforce payment obligations on other people<\/em>. Isn\u2019t this curious? How can the \u201cfree bankers\u201d herald Scottish free banking when customer redemptions were not permitted for a period of over 20 years? <\/p>\n

    For evidence, see Rothbard\u2019s writing in \u201cThe Myth Of Free Banking in Scotland<\/a>,\u201d his response to White:<\/p>\n

    \n

    \u201cFrom the beginning, there is one embarrassing and evident fact that Professor White has to cope with: that \u2018free\u2019 Scottish banks suspended specie payment when England did, in 1797, and, like England, maintained that suspension until 1821. Free banks are not supposed to be able to, or want to, suspend specie payment, thereby violating the property rights of their depositors and noteholders, while they themselves are permitted to continue in business and force payment upon their<\/em> debtors.\u201d <\/p>\n<\/blockquote>\n

    Later, Carter is talking about credit in general: <\/p>\n

    \u201cA world with no credit is a dismal one. Credit \u2014 responsibly extended \u2014 is the cornerstone of civilization. It unleashes savings and puts the money to work in productive areas of the economy. A world without credit is a sterile, stagnant one.\u201d<\/p>\n

    So, as discussed above, the key distinction to understand here is commodity credit <\/em>(OK) versus circulation credit <\/em>(fraudulent and causes economic instability). Once we make this distinction, it is all much clearer. <\/p>\n

    To spell this out: From a Rothbardian Bitcoiner point of view, in principle there could be a bitcoin bank that takes in bitcoin, and loans out commodity credit <\/em>loans denominated in bitcoin \u2014 and there\u2019d be no issue as there is no fiduciary media created. It\u2019s just that today, such a proposition would be extremely high risk as very few entrepreneurs and businesses have successfully ROI\u2019ed in bitcoin terms over longer periods of time. In this sense, there would be very few customers and very few lenders willing to take this kind of risk for appreciable bitcoin sums over an appreciable time period. In practice, this kind of thing might more realistically occur post-hyperbitcoinization or closer to it. <\/p>\n

    Carrying on with Carter\u2019s article, Carter quotes from my recent article on Bitcoin Maximalism<\/a>, speaking of how most Maximalists are simply not interested in non-monetary uses, and commenting on the recent failures of lenders in the space. I commented that there\u2019s a case to say that the Maximalists who encouraged self custody and not putting bitcoin on high-risk platforms were right. <\/p>\n

    Here\u2019s Carter: <\/p>\n

    \u201cBut were they? If their victory condition is \u2018no credit is ever extended based on a crypto asset ever again,\u2019 they guarantee a loss.\u201d<\/p>\n

    So, as above, the distinction to keep in mind is commodity credit versus circulation credit. I believe that commodity credit could theoretically work under a Bitcoin standard with full-reserve banking. Therefore, my point is not \u201cno credit ever\u201d and Carter\u2019s statement here is overly reductive. <\/p>\n

    Also while we\u2019re here, it\u2019s worthwhile pointing out that this specific debate about \u201cfree banking\u201d fractional reserve versus full reserve isn\u2019t really a question of Maximalism per se. It\u2019s an orthogonal debate as a person could conceivably be a \u201cfree banker\u201d and Maximalist, or they could be in favor of full reserve and Maximalist. <\/p>\n

    Carter continues:<\/p>\n

    “The desire for leverage and a lower cost of capital on one hand, and yield on the other, is inherent to free, capitalist enterprise, and that urge will never disappear.\u201d<\/p>\n

    Of course people want <\/em>leverage. The question is, can it be ethically and sustainably provided? And would it be beneficial to society? Under a fractional-reserve banking system with fiduciary media, sure, it can <\/em>be provided \u2014 the challenge and question is more about whether such a thing is ethical or desirable for the overall economy. I say no, it\u2019s not. It does not enrich society on the whole, it merely enriches those getting the newly-printed tokens first, and bankers servicing those interests. <\/p>\n

    Speaking of Bitcoin Maximalists warning about fractional-reserve practices, Carter mentions:<\/p>\n

    \u201cThey cannot extinguish the demand for credit or yield \u2014 and entrepreneurs will always emerge to fill this need.\u201d<\/p>\n

    And I\u2019d respond that such a system would be unethical and it would be inherently unstable without a lender of last resort. And if that lender of last resort cannot print tokens (which obviously can\u2019t be done in Bitcoin beyond 21 million coins), then the system won\u2019t be long-term sustainable. <\/p>\n

    It could even seem sustainable for a period of time, but such a system cannot possibly be useful for the economy as a whole. If fractional reserve banks are permitted to increase the quantity of money titles (e.g., bitcoin IOUs), this merely enriches some market participants at the expense of all others.<\/p>\n

    What Are Some Of The Potential Risks Based On How The Industry Develops?<\/h2>\n

    From my perspective, people will need to learn the difference between bitcoin for which they hold the private keys, and mere bitcoin IOUs. If people blur the line here, or perhaps even equivocate the different IOUs of different providers (say a Celsius bitcoin IOU with a Voyager bitcoin IOU), this more easily opens the door to widespread fractionally-reserved coins that effectively go above the 21 million cap. <\/p>\n

    Of course, this risk may not be systemic, it would be localized to those individuals who are overly trusting of other peoples\u2019 IOUs. Nevertheless, it\u2019s worthwhile for bitcoin HODLers and users to understand this crucial difference. <\/p>\n

    Does This Mean We Shouldn\u2019t Even Use Fiat Credit Today? <\/h2>\n

    Not necessarily. As my friend Pierre Rochard wrote eight years ago in his prescient article, \u201cSpeculative Attack<\/a>,\u201d we may well see individuals leverage up using the fiat system. In this way, they are using the fiat system against itself to stack more sats and perhaps help advance the process of hyperbitcoinization. Now of course this carries risks and costs, but for certain individuals or entities who can access cheap credit, such as MicroStrategy, it might well be reasonable. <\/p>\n

    Where Might There Be Some Common Ground?<\/h2>\n

    I believe both sides of the \u201cfree banking\u201d versus full reserve debate would welcome the development, commercialization and widespread use of proof-of-reserves techniques. Credit to Carter for being a vocal proponent of proof-of-reserves technology<\/a>. This has been implemented in various places in the Bitcoin and \u201ccrypto\u201d world, such as at Kraken<\/a>, Ledn and at previous Bitcoin exchange Coinfloor U.K. (since purchased by Coincorner<\/a>). <\/p>\n

    The disagreement in this case would be on what the reserve ratio should be, as \u201cfree bankers\u201d may conceivably be fine with a reserve ratio of 2%, while full-reserve Bitcoiners want a 100% reserve ratio. <\/p>\n

    Full-reserve Bitcoiners also appreciate the explicit no-rehypothecation approach of lenders such as Unchained Capital<\/a>. Because Unchained loans use Bitcoin multisignature technology, the coins may not be rehypothecated as all three key holders (borrower, unchained and third-party key agent) can confirm exactly what\u2019s happening to the bitcoin on-chain. <\/p>\n

    The fiat USD being loaned out for these loans is obviously still a part of the broader USD fractional-reserve banking system. <\/p>\n

    In Practice, Where Are We Going With Debt And Equity Anyway? <\/h2>\n

    Now you could believe that in practice, over the longer term, there won\u2019t be much or any commodity credit extended. Saifedean Ammous argues a similar point in his book \u201cThe Fiat Standard<\/a>: and discussed this with me on \u201cSLP296<\/a>.\u201d <\/p>\n

    Without fractional-reserve lending subsidized by cheap debt, investors may reach a saturation point sooner with their capital. If time preference and interest rates are genuinely very low, investors may not want to take the risk of loaning out bitcoin via a debt instrument, given that the interest rate offered is very low. Investors may very much prefer to give some bitcoin in exchange for an equity share in a business. <\/p>\n

    So, on this basis, there may legitimately be an argument that there would be very little commodity credit extended anyway. In this world, we\u2019d see far less debt issued, and more equity investment. <\/p>\n

    Conclusion<\/h2>\n

    If you believe in the Bitcoin saying \u201cnot your keys, not your coins,\u201d then you too are in favor of full-reserve bitcoin. The view implied by those who want to permit \u201cfree\u201d fractional-reserve banking is one where there are multiple claimants to the same coins or same resources of society. This difference cannot be squared in my view. <\/p>\n

    It\u2019s also important to understand that there are legitimate arguments as to how and why we ended up in a fractional-reserve system that was not the result of a free market. Of course, bankers are always trying to do this, because it allows them to profit massively! The \u201cfree-banking\u201d movement is special pleading on behalf of inflationary commercial banks. <\/p>\n

    Society would not be less vibrant in a world without fractional reserve banking. If anything, the society we live in today is more sterile and stagnant because of the artificial boom and bust conditions that capitalist investors and entrepreneurs have to deal with. Moving to a bitcoin full reserve system could in practice make society far more prosperous with continued sustainable growth, rather than \u201clumpy\u201d artificial booms followed by busts. <\/p>\n

    Thanks to my friend <\/em>Pierre Rochard<\/em><\/a> for his feedback on this article. <\/em><\/p>\n

    This is a guest post by Stephan Livera. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

    As we continue to debate the proper roles of crypto and lending, bitcoin full reserve can be the future for credit and commerce.<\/p>\n","protected":false},"author":2807,"featured_media":7847,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[34],"tags":[1156,587,1517,635,1537,59],"class_list":{"0":"post-7846","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-austrian-economics","9":"tag-banking","10":"tag-celsius-network","11":"tag-finance","12":"tag-lending","13":"tag-opinion"},"author_data":{"id":2807,"name":"Stephan Livera","nicename":"stephanlivera","avatar_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/12\/stephan-livera-promo-image-96x96.png"},"featured_image_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/federal-reserve-adds-278-billion-to-us-economy.jpg","_links":{"self":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/7846","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/users\/2807"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/comments?post=7846"}],"version-history":[{"count":0,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/7846\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media\/7847"}],"wp:attachment":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media?parent=7846"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/categories?post=7846"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/tags?post=7846"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}