I'd love to read on thoughts about how a digital currency will change economic policies, the market, and just things in general. If its decentralized (i.e. the currency is not distributed from a central bank), then presumably you can't deflate or inflate the value of the currency in order to encourage economic growth (am I getting this right?). Also I'm wondering what Bitcoin means in terms of banks. If I don't need a physical safe to hold my money anymore, then obviously banks will be forced to go digital as well right? And what does that mean for financial instruments? How does a digital currency play in with high-frequency trading?
So many questions. Bitcoin is really making re-evaluate a lot of things. I think I've given you a sense of what I'm looking for.
Long story short: The ECB is worried about Bitcoin because unlike e-gold and other centrally clearing solutions, the peer-to-peer bitcoin doesn't have a central guy doing all the transaction clearing so there is no-one to bully and arrest.
If I don't need a physical safe to hold my money anymore, then obviously banks will be forced to go digital as well right?
I'm no expert, but I don't think that most banks would actually hold paper notes for every dollar they are storing for their account holders. In reality banks are already pretty much digital for most transactions.
What I am wondering is when* various governments are going to start enforcing existing regulations^, that apply to banks, on the various bitcoin exchanges.
* perhaps the exchanges already comply with these regulations, but I would be surprised.
^ don't ask me what the regulations are, I am guessing that banking is/should be a heavily regulated industry in most countries.
Oh no not at all, you're right. I'm not sure if this is the correct terminology but, googling it, I think it's called reserve requirement. "The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes." [1] An example they give is Hong Kong whose banks must hold 25% of their liabilities.
During the subprime mortgage, American banks (and some foreign banks but I can't recall them) were deregulated in a way that allowed them to have a higher ratio between their liabilities and what they actually held. This meant they could increase their financial investments without really having the money. I can't remember the exact ratio but it was something like 40-1.
There is absolutely zero concensus on these things, within and without the bitcoin community. So, you can chat with people about it, but there are no "canonical" answers to those questions, except to the degree that you can answer them yourself to your own satisfaction.
Intentional inflation and deflation of bitcoin is impossible, but one could imagine the creation of a digital currency where it would be possible.
You don't need to put bitcoins in a bank for "safe keeping," but in a mature bitcoin economy, you'd probably want to invest them in some form, so there would be banks that give out loans. They can't use fractional reserve banking unless they issue their own "notes" (digital or otherwise) that are redeemable for bitcoin. In such a case, there would be no required fractional reserve, unless one were to be instituted by law. Basically, in all these aspects, you can really think of bitcoin as a digital fom of gold. Banks used to hold gold in their vaults and give out redeemable bank notes, so this has happened before historically.
So many questions. Bitcoin is really making re-evaluate a lot of things. I think I've given you a sense of what I'm looking for.