There have been numerous times in crypto space history where it was discovered that a crypto exchange was found to be running on a fractional reserve, and usually that ends with the crypto exchange being obliterated by the crypto equivalent of a bank run. However, all banks in the United States previously ran on a 10% fractional reserve, and now the Federal Reserve (Fed) has lowered the reserve requirement to 0%. This makes a powerful argument for using Bitcoin (BTC) instead of banks as will be explained in this article.
Many years ago the reserve requirements for banks in the United States was over 20%, which is still pretty extreme compared to any crypto exchange caught running on a fractional reserve. The reserve requirement steadily declined to 10% over the years.
To give an example of just how crazy a reserve requirement of 10% is, let’s say a man named Joe deposits $1,000 at the bank. The bank is then free to loan out $900 to Bob. Bob then buys a $900 package of steaks from Antonio, and if Antonio deposits the $900, then the bank is free to loan out $810 of that money to Pablo.
Ultimately, a $1,000 deposit leads to $9,000 of loans being given out, i.e. debt. However, if all $9,000 of that money is requested to be withdrawn at once, then the bank would go bankrupt since they only really have $1,000.
On March 16 the Federal Reserve cut the bank reserve requirement to 0% as part of the many measures taken to reverse the Coronavirus induced economic crash, so now banks do not need any reserves at all.
This literally means that any bank in the United States can now print money out of thin air, just like the Federal Reserve. Now banks can loan as much money as they want to whomever they choose without basically any regulatory oversight, since previously regulations on loans mostly centered around reserve requirements.
This is both good and bad. The good thing is this can drastically increase the chances of people with subpar credit to get mortgages, loans, etc.
The bad news is this means banks do not have to have any real cash, and a run on the banks could quickly cause banks to fold up. In other words, someone’s checking account balance might display a balance of $10,000, but the bank actually doesn’t have that money anymore, since the banks are free to spend all of their reserves.
Indeed, the Federal Deposit Insurance Corporation (FDIC) put out a plea to keep money in banks which can be seen in the below video. There has been a major uptick in people withdrawing cash from the bank, but the FDIC is saying that banks are the safest place to keep cash, and that pulling cash out is unsafe. Overall, even though this video is professionally presented and from a government organization, it reeks of desperation.
Based on what is actually going on with bank reserves as explained in this article, it is obvious that pulling cash out of the bank is better than keeping it in a bank, since the cash you hold in your hands is real, but digital bank balances have little to nothing backing them in this environment.
Finally, this makes a very strong argument for using Bitcoin (BTC) instead of banks. Bitcoin (BTC) accounts display the amount of Bitcoin (BTC) that a person owns, and not a penny less. In other words, Bitcoin (BTC) is 100% there and doesn’t use any fractional reserve. Therefore, the safest option when it comes to digital currency at this point is Bitcoin (BTC), rather than bank balances which have little to no backing.