Right now a huge amount of bitcoin is stored in accounts in exchanges. Just as you exchange cash for bank-denominated currency ("checking"), you exchange BTC for MtGox-denominated "currency" (your MtGox balance)
MtGox just as easily operate a fractional reserve system on that MtgOX-denominated balance as a bank does on cash.
This is how all banks worked before the advent of central banking. As with MtGox, in the world before central banking, exchanging real money (coinage and federal certificates) for bank-denominated money (checking) was a risky choice.
> This is how all banks worked before
Yes, before the 19th century. I didn't live back then, but I'm guessing we've come a long way since then: the credit card, online banking, security, etc.
Can you please explain to me how can a BTC exchange can run fractional reserve banking with the current design of Bitcoin? Because I can't.
You give your BTC to MtGox. At this point, you no longer hold your BTC. You have exchanged BTC for a MtGox-denominated currency that is ostensibly convertible to BTC.
At that point, nothing stops MtGox from operating a fractional reserve bank. Or just stealing your deposits.
Substitute any other "exchange" name for MtGox. The principle is the same.
that's is not fractional reserve banking. on top of that, yo required another currency (another risk), a requirement you don't need with the current system
I think maybe you are talking about the money creation that a central bank can do. That involves more than just fractional reserve banking, but it often is done in the context of fractional reserve banking.
It would be useful for you to explain how 'making loans of deposits' is not a reasonable simplification of that.
Of course actual banking practice is more complicated, but the core meaning of fractional reserve banking is to make loans (or investments, but that is a reasonable thing to leave out in a simplification) out of (demand) deposits (the difference between a deposit and a demand deposit is just a technical matter, for btc the lending institution and depositor would have to work out how immediately available the deposited coins would have to be).
MtGox just as easily operate a fractional reserve system on that MtgOX-denominated balance as a bank does on cash.
This is how all banks worked before the advent of central banking. As with MtGox, in the world before central banking, exchanging real money (coinage and federal certificates) for bank-denominated money (checking) was a risky choice.