Bitcoin Bank Run

Bitcoin Bank Run
Profile photo of David Howden

Ever wonder what a digital bank run looks like? Nearly one million Mt. Gox users are finding out first hand.

The Tokyo-based exchange, popular amongst currency traders, has risen in prominence by offering its customers storage services in a variety of currencies. This effectively makes it act as an online bank. One such “currency” that it allows accounts to be denominated in is bitcoin.

Yesterday the exchange halted withdrawals of the digital currency, citing a technical malfunction. It promises to reopen for business give new information on its financial situation on February 10th. What many news sources are missing is that this is not a particularly new development – the exchange has been rejecting customer withdrawals on-and-off for about two months.

What may be happening is a good old fashioned bank run. Like all banks, Mt. Gox is operating under a system of fractional reserves, loaning out or otherwise making use of bitcoin deposits entrusted to it. There are many more claims to the bitcoins depositors have with it than are actually in the digital “vault” at Mt. Gox. This is not unlike your bank, which has many more claims to each dollar deposited in it than it has dollars in the vault to honour. If too many people make a withdrawal at the same time, your bank has two options.

Option one is that everyone gets some small percentage of their original deposit. Option two is that only the first small percentage of people who get to the bank first get their whole deposit. Neither option looks very appetizing.

Mt. Gox has decided to use a method to stymie its own bank run which is not without precedent – it has halted redemptions. Of course, this policy was used widely by banks in many fractional-reserve regimes before the advent of deposit insurance, notably in Scotland.

In the Scottish fractional-reserve free banking experience, the option clause stated that a bank could halt redemption of a depositor’s funds, but would have to pay interest for this privilege. Besides the obvious rights violation of turning your deposit into a loan (but hey, at least they paid interest on it), the policy was also not able to stop banks from loaning out deposits until there was nearly a continual suspension of withdrawals. (At least, according to the expert on the period, Sydney Checkland.)

Mt. Gox has used this policy with a twist. Instead of promising your money back in the future with an added interest payment, it is “allowing” you to withdraw your bitcoin now by paying an additional fee.

Lest this post be misunderstood, this is not a fundamental problem of bitcoin, but one of fractional-reserve banking. Here we have an example of a purely unregulated currency succumbing to the same problems that have plagued money users for hundreds of years. When banks are allowed to function with fractional reserves, it matters not if the money is state-issued (like dollars) or market-created (like bitcoin), the outcome is the same: bank runs and depositors left with the inevitable losses.

  • Togel Online Klik 4D

    There is no evidence they are practicing lending. Your article makes a lot of assumptions, but characterizing Mt. Gox as a bank is strictly inaccurate…!!!

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  • Eelii Disoza


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  • Chad

    Well, it seems they were operating under fractional reserve. Though, due to losing the funds through gross negligence and ignoring best-practices of running a Bitcoin service rather than lending. It also seems they were unaware. The funds have been slowly slipping away without their knowledge. They seemed to realize it and these actions were a result. Functionally similar to a bank run… but so much worse.

  • OR-

    How would they be lending bitcoins? Could they just pretend to be a seller in own system, sell non existing bitcoins to customers who leave their coins in the system and invest the dollars?

  • The Narrator

    I know they are not allowing BTC withdrawals. That was my whole point: that Howden claimed that they were (but for an additional fee) but didn't provide any evidence for that claim.

    Anyway, I'm done with this.

    • David Howden

      Hi The Narrator:

      I actually said they "halted withdrawals" (third paragraph), and that they have "used fees" (penultimate paragraph) as a way to stymie redemption requests. I don't see how either of those statements are incorrect.

  • The Narrator

    No, we're not talking past one another. You're simply being evasive and aren't acknowledging the serious problems in your blog post.

    And no, as I pointed out in my response to Redmond, his links are about USD withdrawals, not BTC withdrawals (which is what I asked you about).

    And again, if in your original post you had not presented your (and other people's) speculation that Mt.Gox is engaging in frb as a fact, then you would have avoided at least one big flaw in your post (the unsubstantiated 'withdraw btc for a fee' claim would still be there of course).

    What's so hard about this?

    (which is not unlike what she said)

    • Redmond

      As I said "Narrator", we discuss it in an Upcoming podcast where we discuss specifically what a "Bank" is and what "FRB" is.

      And as you'll note, Magic: The Gathering Online Exchange is not allowing BTC withdrawals at any price.

      It will be live tomorrow at


    • Dan Ratzlaff

      Mt. Gox is not a bank, it is an exchange. There is no evidence they are practicing lending. Your article makes a lot of assumptions, but characterizing Mt. Gox as a bank is strictly inaccurate.

      • David Howden

        Hi Dan:

        they act as a custodian as you can hold your BTC with them. By that measure they are a bank. And I never said they lend anything, again, FRB does not rely on a loans market, the only necessary condition is that there are fewer assets in reserve than there are claims to.

  • David Howden

    Hi The Narrator:

    the link is in the second article linked to above.

    I didn't realize that accusing a "bank" of holding fractional reserves was so serious, given that basically every bank does it. It is speculation, as is basically everything that you will read on a blog. If you wanted something that was purely factual, it would be pretty slow going. It's a speculation based on a good dose of theory, as I've already laid out. But I'll try one more time.

    If Mt. Gox is full reserve there is no worry that someone with BTC in it will get it back when it reopens. It will be held in a segregated account, and if this is a technical glitch then once it is resolved everyone will have access to their funds. (One could argue that the regulators could close it down and confiscate the deposits, though there is no evidence that Mt. Gox's problems this time 'round are regulatory in nature.)

    Right now there is a pretty severe divergence between the price of BTC on Mt. Gox and those on other exchanges:

    If Mt. Gox is fully reserved this is the arbitrage of the year (and it's only January!). Buy BTC on Mt. Gox and wait for its temporary problem to get resolved and sell them on a different exchange. (Not exactly a risk-less profit since you can't simultaneously lend or sell your BTC, but roughly analogous.)

    The fact that Mt. Gox BTC is selling at a discount further suggests to me that its depositors are unsure of what they will get back. Incidentally, this price divergence violating the law of one price is also what happened to deposits at fractional-reserve banks before deposit insurance.

    Yes, it's speculation, as is the claim that Mt. Gox is fully reserved, as are pretty much all claims on blogs (this isn't an academic journal, after all). But it's an educated speculation based on some fairly standard theory. It's also not exactly a ground-breaking revelation (but that it were!) as depositors in Mt. Gox must be feeling the same way, as evidenced by the BTC price discount.

    So for anyone that thinks it is fully reserved, swoop in and buy up all the BTC that you can. It'll be the trade of the year! (For me, I'd rather take an educated guess that sitting on the sidelines until it gets resolved is a better approach.)

    • David Howden

      Hi Konrad:

      agreed – that is a positive aspect about bitcoin. I'm more referring to holding BTC in a bank (or equivalent) as a source of the problems. (e.g., As was the case under the gold standard and fractional-reserve banking.)

    • Dave

      If Mt Gox doesn't have the bitcoins, that is unlikely to be because it has been lending them out (as others have observed – there is not presently any market for bitcoin loans). Much more likely would be that it has been dealing on its account using customer funds (rather like MF Global).

      • David_Howden

        Hi Dave:

        I agree 100 percent. It´s more like securities lending in this sense.

      • Narrator

        if they don't have the coins, then a more likely explanation than frb is that they may have been the victims of fraud, and/or that authorities may have seized or otherwise made it impossible for them to control part of their coins, and/or that they may lost the coins through incompetence.

  • Peter Šurda


    even though nothing is "stopping" Mt. Gox from practicing fractional reseve banking, it would make little economic and legal sense. There is no demand for it, and would create legal problems for Gox. Of course I do not know whether they do have fractional reserves, I don't think they do. I decided to make a blog post about it, stay tuned.

    • David Howden

      Hi Peter:

      I'm not so sure it would create legal problems. It would probably just get classified as securities lending, which varies in legality around the world, but I'm fairly certain it's fine in Japan. On the demand side, I'm also not so sure. Historically it was bankers who demanded fractional reserves as it gave them a revenue stream otherwise not available. If you do write a blog on it let me know so I can read it.

  • Neal Gafter

    "Yesterday the exchange halted withdrawals of the digital currency, citing a technical malfunction. It promises to reopen for business on February 10th."

    No, it did not promise to reopen on the 10th. It said that it would give more information on the 10th.

    • David Howden

      Hi Neal:

      thanks for the correction. I'll update the post accordingly.

  • Riley

    I am no fan of gox and don't have any funds there however this article is either ignorant or dishonest.

    There is very little to NO lending market for bitcoins, so they couldn't really even have a fractional reserve banking like what you speak of. They could however be INSOLVENT, meaning that they lost the funds either by hacking or stupidity.

    I for one, do not believe that gox is insolvent. Instead I believe that gox is under SEVERE government scrutiny and had no choice but to stop withdrawals in an effort to work with regulators.

    The biggest point I am trying to make is that this story is merely an opinion, there is no facts that can be verified from it. I am very disappointed in the author.

    • David Howden

      Hi Riley:

      like I noted above, there need not be a lending market in the deposited good for a depository to function with fractional reserves. The depository just needs to sell some of the deposited good so that there is less in reserve than clients have on demand.

      I also never said that Mt. Gox was insolvent. Most fractional-reserve banks never enter insolvency, though runs can make them illiquid. Charging customers to redeem BTC is a variant on a time-tested method fractional-reserve banks have used to offset or otherwise evade illiquidity.

  • Chad

    Many people have made the allegation and many don't believe Gox, but Gox has claimed in the past the they do not operating under fractional reserve. To say they do is an allegation of fraud and you seemed to leave out that you were making that claim. There is some amount of evidence that they do, this situation that you are writing about for one. There are also other explanations to the happenings, such as poorly written software. If you know anything about the operator this is quite a believable explanation. As long as their operation cost has been lower than what they bring in through commissions, (quite possible) they should have every dollar and bitcoin backed by the real thing. To say Gox operates under fractional reserve as fact with no caveat is either ignorant or dishonest.

    • David Howden

      Hi Chad:

      if it was a technical glitch than there would be no redemptions. As it stands, redemptions are allowed for a fee, which to me suggests that there is not enough bitcoin in reserve to meet redemption requests. Like I said, charging a fee to redeem is the exact same method used by other fractional-reserve banks that existed without a deposit insurance safety net (e.g., by exercising an option clause).

  • Christophe

    Given that there isn't a lending market for bitcoins, it is unclear that this is a case of fractional-reserve banking at all.
    It's highly likely this wa massive technical incompetence leading to broken software and/or lost private keys.

    • David Howden

      Hi Cristophe:

      there doesn't need a lending market in the stored good to qualify as fractional-reserve banking. All the depository need do is sell some of the deposited goods. Consider similar examples like the gold standard or the 19th century wheat elevators. Neither gold or wheat had a lending market but both had fractional reserve depositories.

  • The Narrator

    What is the evidence for your claim that Mt.Gox is engaging in fractional reserve banking? It's a pretty serious accusation.

    • David Howden

      Hi The Narrator:

      Mt. Gox holds BTC in a hosted (i.e., shared) wallet. There is nothing stopping it from practicing fractional reserve storage. I've made what I would say is a pretty standard claim based on the fact that it has decided to implement a policy (charging for redemptions) which other fractional-reserve banks have used to guard their liquidity when unprotected by a deposit insurance safety net. If it was a technical glitch than why would Mt. Gox allow redemptions at a fee? (As an aside, the internet seems full of claims that it is operating with fractional-reserves, so that part of my post is not terribly new.)

      • The Narrator

        So you present as a fact what in reality is mere speculation. You don't think there is something seriously wrong with that? (especially, but by no means solely, because it's a pretty serious accusation)

        Also, what is your evidence for your claim that Mt.Gox is allowing bitcoin withdrawals for an additional fee? I haven't read that anywhere else (and that includes the articles you link to).

        • Redmond

          As for the Fee, you will find purported clients of MtGox mentioning that they were offered this option – you can find it mentioned on many forums

          and here is a screenshot

          • The Narrator

            no, they're talking about USD withdrawals while Howden was talking about BTC withdrawals.

          • Redmond

            Actually, he is talking about both…

            Anyways, we just recorded a podcast on it, so you can listen in! We discuss some of the issues that you have raised.

            check it out tomorrow at

          • The Narrator

            I ask Howden what his evidence is for his claim that Mt.Gox is allowing bitcoin withdrawals for an additional fee. You respond by giving evidence for the claim (never contested by me) that Mt.Gox is allowing USD withdrawals for an additional fee. See the problem?

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Profile photo of David Howden

David Howden is Chair of the Department of Business and Economics, and professor of economics at St. Louis University, at its Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute's Douglas E. French Prize. Send him mail.

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