The Internet Freedom Bank

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  4. The Internet Freedom Bank (IFB) is a proposed distributed,
  5. censorship-resistant bank that can fill the vacuum left by Liberty
  6. Reserve in terms of permitting the type of private, neutral, and
  7. unobstructed electronic fiat transfers that the legacy banking system is
  8. legally unable to provide. The purpose of the bank is to provide
  9. cryptocurrency exchanges with fiat liquidity until such time as no more
  10. demand for fiat currencies exists.
  12. The organization itself is run by a network of volunteers who can elect
  13. to operate under their legal names or pseudonymously. Organizational
  14. roles are generally horizontal, except for a group of trustees. The
  15. trustees should be 7-9 individuals, not more than half of whom can be
  16. anonymous, who must live in different legal jurisdictions. The only role
  17. of the trustees is to hold the private keys necessary for the bank to
  18. distribute its BTC assets, an operation which should be infrequent. The
  19. private keys will be split such that (n/2+1) trustees must agree to
  20. approve any outgoing transaction.
  22. Unlike most banks, the IFB will not hold reserves in a central location.
  23. Instead, individual members all over the world are responsible for
  24. holding deposits and redeeming bank-issued electronic notes. Customers
  25. who want to make a deposit to the bank must find a member near them
  26. willing to accept fiat. When a customer deposits fiat with a member,
  27. their account is credited with the appropriate balance. Withdrawals work
  28. in a similar fashion. A customer who wants to withdraw fiat must find a
  29. member willing to redeem their balance.
  31. This basic structure will allow the bank to offer account denominated in
  32. any currency or commodity, as long as members exist who are willing to
  33. hold that currency or commodity in reserve and remain available for
  34. redemptions. For the rest this discussion will refer to
  35. dollar-denominated accounts, but the same principles apply to all other
  36. currency (or precious metal)-denominated accounts. Also for the
  37. remainder of the discussion "dollars" will refer to traditional USD (in
  38. cash, legacy banking system instruments, or mainstream services like
  39. PayPal) and "vUSD" will refer to USD-denominated balances in the IFB system.
  41. Members join the bank by forming a reserve agreement with the IFB. For
  42. example, Alice might sign up as a member, agreeing to hold $1000 in
  43. reserve, she will make available for redemptions via in person trades,
  44. ACH transferrers, or mailed money orders, within 72 hours of any request
  45. she receives. When the agreement is accepted, the IFB credits Alice's
  46. account with $1000 in vUSD, which she is free to spend, with the
  47. understanding that every vUSD she spends is one she is obligated to
  48. redeem in the future.
  50. In order to give Alice the incentive to uphold her agreement, and to
  51. give customers and other entities a reason to trust the solvency of the
  52. IFB (and by extension, the validity of vUSD), the IFB requires Alice to
  53. post collateral in order to approve the membership agreement.
  55. The IFB trustees hold collateral in the form of the organization's BTC
  56. reserves. Each currency for which the IFB offers deposits is assigned a
  57. single, publicly-known bitcoin address. Members deposit their collateral
  58. to this address, so any interested member of he public can independently
  59. verify the bank's reserve ratios and thus its solvency.
  61. In order to determine the amount of collateral necessary for a given
  62. reserve agreement, the IFB will conservatively value bitcoins at 95% of
  63. the 200 day simple moving average of the volume-weighted exchange rate.
  64. Based on past history, the 200 day SMA for the USD-BTC exchange rate
  65. rarely decreases significantly, so this should give the bank plenty of
  66. opportunity to maintain solvency.
  68. The bank will periodically check to see which members have excess
  69. collateral based on improvements in the exchange rate. Those members
  70. with excess collateral could request a BTC refund, or could receive
  71. additional vUSD credit. The bank will never issue vUSD to a member
  72. without an explicit agreement, because the member is responsible for
  73. holding as many vUSD as they have been issued in reserve to fulfill
  74. redemption requests.
  76. A member closes their account by returning all the vUSD they have ever
  77. been issued back to the IFB, who then returns the collateral and takes
  78. the vUSD out of circulation. If a member does not possess enough vUSD to
  79. close their account, BTC from the reserve address is sold on the open
  80. market for vUSD to make up the difference, and the amount of BTC sold is
  81. subtracted from their collateral. This is also the same procedure that
  82. would be used if a member defaults.
  84. In the event of a prolonged reduction in the BTC exchange rate, the bank
  85. will request additional BTC collateral and/or return of vUSD from its
  86. members prior to insolvency in an action similar to a margin call.
  88. The computing infrastructure for the IFB will be built on Open
  89. Transactions, with servers distributed around the world both in the
  90. public Internet, and in the major anonymization networks. vUSD will be
  91. issued by the IFB, and will be tradable on any OT servers and any other
  92. services which implement the OT protocol. By adding OT support to their
  93. platforms, cryptocurrency exchanges can allow their users to move fiat
  94. between their exchange accounts and their IFB balances. This his how the
  95. IFB will provide fiat liquidity to the cryptocurrency exchange ecosystem.
  97. IFB customers need an easy way to locate IFB members near them, or
  98. otherwise willing to exchange dollars to and from vUSD. In order to
  99. accomplish this, the IFB could potentially work closely with LocalBitcoins
  100. (LB). IFB members will list on LB just like traders there already do, and the
  101. process of conducting trades will be identical to the existing process,
  102. but instead of trading to and from BTC, they will trade to and from vUSD.
  104. Bob is a LB user who wants to buy bitcoins. He logs on to his account
  105. and sees that his wallet contains $0 and 0 BTC. The first thing he does
  106. is find a trader willing to load up his dollar account, either via in
  107. person cash trade or some type of online trade (the same as the two
  108. existing trade types on LB). Once Bob provides this, the seller releases
  109. the escrow and Bob now has a dollar balance in his wallet. From this
  110. point, Bob can simply click the "Buy Bitcoins Now" button and the site
  111. will execute a market order behind the scenes and credit his BTC
  112. balance, or he could navigate to the trading section of the site and
  113. conduct his own trades. When he decides he wants to cash out some
  114. dollars, he does the exact same process in reverse: finding a trader
  115. willing to buy his vUSD for a local cash or online sale. IFB members are
  116. allowed to set their own commission on trades, with LB taking their fee
  117. as well, in the same way the site is already structured.
  119. Should LocalBitcoins prove to be uninterested in such an arrangement, it
  120. would be possible to partner with another site, or create a new site
  121. specifically for the IFB.
  123. The advantage of restructuring LB in this way is that it allows the site
  124. to focus on the P2P interactions, while the currency trading is taken
  125. care of by a dedicated engine (perhaps based on Buttercoin). With the
  126. IFB providing liquidity and LB providing the customer interface, the
  127. Bitcoin ecosystem will become much more resilient to legal and banking
  128. attacks. This arrangement allows the members of the IFB to leverage
  129. their collective dollar liquidity, which is a resource that is too
  130. distributed to be effectively regulated or censored. As long as
  131. individuals are allowed to conduct financial transactions with other
  132. individuals, the IFB will be able to manage large dollar flows without
  133. relying directly on the legacy financial system, in a manner that would be
  134. extremely difficult to regulate or censor.
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