How does fractional reserve affect the stability of digital currencies?

1 answers

• Mar 19, 2022 · 3 years ago
  Fractional reserve is a common practice in traditional banking, but its impact on digital currencies can be different. In traditional banking, fractional reserve allows banks to create money through lending, which can stimulate economic growth. However, in the context of digital currencies, fractional reserve can introduce instability. When a digital currency exchange operates on a fractional reserve basis, it means that they are not holding all the digital currencies deposited by users. This can create a situation where the exchange becomes insolvent if a large number of users try to withdraw their digital currencies at the same time. The lack of regulation and oversight in the digital currency market makes it difficult to assess the extent of fractional reserve practices. Therefore, it is important for users to choose exchanges that prioritize security and transparency to mitigate the risks associated with fractional reserve.
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