There’s no difference. If you’re going to allow B to borrow A’s share and sell it to D, now both A and D own a share. D can lend their share to E, who sells it to F. (D has no idea they bought some special share, because they didn’t.) Now, F to lend to G who can sell to H, etc.
Friction is the difference. Naked shorting removes the need to locate borrow. That need acts to prevent runaway supply expansion. Naked short selling also circumvents the rights of share owners as a class to decide whether to allow synthetic share creation.
Proper shorting: Alice lends her share to Bob, Bob sells the share to Carol
=> Alice has a share (lent to Bob, who will have to pay her the eventual dividends), Bob owes a share to Alice, Carol has a share (which has full rights including voting and dividend)
Naked shorting: Bob sells an imaginary share to Carol
In the situation being discussed, where more shares than the available float are shorted, they are functionally the same because both can theoretically create infinite amounts of shares.
I'd say that having the share is important for the person buying the stock.
Short-selling is forbidden to reduce the risk that when you want to buy a share and buy the share you find a few days later that in fact you didn't quite buy a share because whoever sold the share to you didn't have one to sell.
But it's fine, I concede the point.
As far as I care, you can find weird to distinguish "naked" shorting from "borrow-and-sell" shorting because if the short-seller who didn't borrow the stock before selling it does borrow the stock afterwards to be able to settle the trade the end result is the same.
The person who's most affected by naked shorting is the unsuspecting person who buys the borrowed share from the shorter because nobody actually has that share yet.
From the buyers perspective I can understand the importance of this, I just didn't see how the distinction made a difference to the short interest.
