christbitcoin

Here's how to create a fractional reserve with bitcoin.

1) create a service that offers to store people's bitcoins safely.

2) give depositors an option to receive interest in their bitcoins if they'll allow you to loan them other people.

3) loan some (but not all) of those bitcoins to other people, and charge interest.

4) collect the interest, (optionally pay part of it to the depositors), and use it to fund your operation.

That's it.

I get that you don't think that's fractional reserve banking, but you're wrong. I have just accurately described how the money 'poofs' into existence. I get that you don't understand this truth, but it is indeed a truth.

No.

If I accept $10 in deposits, make $8 in loans, and have $3 of cash on hand, I'm operating a fractional reserve.

I have $11 in assets ($3 cash, and $8 of loans receivable), and $10 in liabilities (cash owed to depositors). There's some risk if my loans go bad, but it's fundamentally sane.

Insolvency, on the other hand would be if I accept $10 in deposits, make $8 in loans, and have $0 cash on hand.

At this point, I'm insolvent. There's no reason to believe I can pay back my depositors because my liabilities are greater than my assets. Even if all the loans are repaid, I simply don't have the money.