Bank and Bitcoin Failures

Posted by John Patrick on


There are a couple of dozen Bitcoin exchanges where you can buy or sell the BTC crypto-currency. Some exchanges provide digital wallet services so that you have a place to store your BTC. If you buy something, you can authorize the seller to take your BTC as payment. How safe are the exchanges and wallet services? Last week, the Mt. Gox Bitcoin exchange in Tokyo declared bankruptcy, and the status of nearly a half-billion dollars worth of BTC is uncertain, at best. Some say that Bitcoin operators should be regulated like banks.

Banks are heavily regulated, but that does not prevent them from failing. The Federal deposit insurance Corporation (FDIC) maintains a list of banks that have failed since October 1, 2000. There have been three so far this year, 24 last year, 51 the year before, and an all-time record of 157 in 2010. The difference between the Mt. Gox failure and a bank failure is that, in the United States, deposits in banks are insured to a limit of $250,000 (see FDIC – Are My Deposits Insured).

Should Bitcoin operators be regulated? A lot of important innovation is occurring around Bitcoin. Credit cards were not designed for the Internet and the fees they charge merchants can be 50% or more of the profit the merchant makes on a sale. Money transfers by working people to family members in other countries incur huge fees. A significant part of the world’s seven billion people do not have access to the world of e-commerce. All of these issues can be addressed by Bitcoin, but yes, I feel there should be some “light” regulation. Operators should be registered with some government entity and should provide full disclosure about who they are, how they are organized, how they operate, and what their security procedures are. They should submit to some form of security audit, such as Andreas Antonopoulos just performed for Coinbase (the BTC exchange that I use).

Consumers need to take responsibility also. Bitcoin is a new payment platform, and should not be viewed as an investment speculation unless you are prepared to lose your investment. The Bitcoin wiki summed it up pretty well.

Warning: Please be careful with your money. When sending money to an exchange or seller you are trusting that the operator will not abscond with your funds and that the operator maintains secure systems that protect against theft — internal or external. It is recommended that you obtain the real-world identity of the operator and ensure that sufficient recourse is available. Because Bitcoin services are not highly regulated a service can continue operating even when it is widely believed that it is insecure or dishonest and webpages recommending them (including these) may not be regularly updated. Exchanging or storing significant amounts of funds with third-parties is not recommended.

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