It’s probably not the end of the (crypto) world as we know it.

Recently Mastercard announced it wanted to patent a fractional reserve cryptocurrency bank. A lot of people were getting really bent out of shape and started to cry that the sky was falling.

https://twitter.com/notsofast/status/1055820036563181568

It even sparked a number of people to write about the impending doom. My favourite being End of 21 Million Bitcoins as you know it by Super Crypto. In it Super Crypto points out the potential problems and risks associated with fractional reserves.

Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank’s accounts at the central bank.

Basically in regards to crypto this means moving the decimal places. The concern is that the hard capped 21 million supply of bitcoin will now be something closer to an infinite supply. Essentially what could happen is what we are witnessing with fiat currencies right now, specifically $USD. There’s been a lot of debate back and forth on what kind of impact, exactly, things like fractional reserves and futures will have on crypto in the long term. While there is cause to be skeptical of these traditional finance methods entering into the wild west of crypto I personally believe that, ultimately, this will more or less lead to the downfall of fiat itself.

As Super Crypto points out in his article

With this patent, the Fractional Reserve Cryptocurrency Bank will be able to LEGALLY trade 10 times more Bitcoins than it holds in its reserve (10% requirement). Rest assured — they will until they remain in control over the financial system.

While this is potentially true let’s think about this another way. The thing to remember is that bitcoin was never meant to work in conjunction with a fiat system. It was meant to replace it. Holding true to that principle you can imagine the following scenario.

Mastercard creates a fractional reserve of bitcoin. This fractional reserve is not the real bitcoin (Bitcoin Cash is Bitcoin). This fractional reserve remains tied and pegged to the fiat world. In other words it’s, much like today’s fiat currency, made up money with no real backing. It’s value is derived by it’s actual commodity’s value in relation to the fiat currency of their choosing. So while Mastercard can move the decimal places and control the value of outcome the truth is this isn’t so.

Think of it in terms of something like comic books. Before digital comics came into existence collectors had to scrounge around to find physical comics which had a known quantity AND were priced based on supply and demand (much like bitcoin). As you can imagine with this single way of obtaining your goods prices would and could fluctuate widely. Then enter digital comics (or fractional reserves). Digital comics of course had an impact on the price of the physical comic. Suddenly people had a way of obtaining copies of rare or expensive titles without having to hunt it down or fork out the cash. This dried up some of the demand in the markets. However for those who were still interested in owning the physical copies this changed nothing except that overall prices had dropped but comics as a store of value or worth did not change. The markets set the price but to say that physical comics are somehow worthless just isn’t so.

The same goes for bitcoin. If you are buying fractional reserves (or fractions of fractions) of bitcoin you’re not actually buying bitcoin. You’re buying an IOU from the actual institution that is selling you bitcoin (kind of like what happens on exchanges). The problem really lies with what works for the population at large. If adoption of this method of owning bitcoin becomes easier and more popular than actual bitcoin it could indeed be game over.

In the comments of Super Crypto’s article Carlos Augusto made what I thought was the actual worry with this scenario.

What could happen is the creation of a new coin by the Rothschilds, which, over the next 5 years, becomes the top crypto asset while Bitcoin fades to obscurity. The Rothschildcoin, of course, would never feature a hard cap on supply. It would support the issuance of new coin according to some protocol or interest rate, and then fractional reserve crypto would be possible.

…

the Rothschilds will need to devise an entirely new way to subvert the sound money that is Bitcoin. Some ingenious way that nobody has ever thought of. Because that is the only thing that would catch us all off guard.

That scenario aside the argument, for me, goes something like this. A physical comic book will always be something of value. That value is determined by it’s worth based on scarcity and demand. While digital copies of the comic book can undercut the value of the physical comic book the real value of the comic book remains intact.

It’s only because we use fiat to relate to and understand the worth of bitcoin that problems like this can happen. If we ever decided to move back to another system of money, like say gold, no one would care about pieces of paper we call money. It’s about whatever we agree to use as the standard that sets the value of any other asset. I say we stop worrying about what the traditional financial industry is going to try and do to prop up their failing system and look towards a better future where we can truly be free of manipulation.

I am not out to sell you hopium, but I don’t think the sky is (necessarily) falling either. The choice is ours do we want to keep the fiat system alive or do we change the whole model? The more people who decide to learn about and adopt bitcoin now the better off we could be later.

The other thing no one is mentioning is maybe this has nothing to do with crypto as we know it. Remember Mastercard is an issuer of debt. Maybe, just maybe, this is Mastercard’s really smart play to be the first one out of the gate to be able to issue debt via crypto to end users. Without fractional reserves they would have to be able to hold 1:1 in crypto to issue the debt. This is obviously hugely problematic for not only something like bitcoin which has a hard cap, but also for a company looking to profit off of selling debt to others. Something to think about instead of getting distracted by the FUD.

References
"End of 21 Million Bitcoins As You Know It" article by Super Crypto
https://medium.com/@super.crypto1/end-of-21-million-bitcoins-as-you-know-it-792e08cf3b24
https://medium.com/@super.crypto1

Rothschilds Quote by Carlos Augusto
https://medium.com/@solrac149/sorry-john-mcafee-is-right-7003f45e0882
https://medium.com/@solrac149

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