Bitcoin Backers Seek FDIC-Style Insurance, American Banker

WASHINGTON — A diverse group of entrepreneurs is attempting to solve a riddle that may hold the key to Bitcoin and other digital currency moving into the mainstream: how to insure accounts.

For all of the energy and innovation behind the Bitcoin movement, perhaps the largest factor separating digital money from bank accounts is the latter are backed by the Federal Deposit Insurance Corp. But Bitcoin wallet services — which operate in some ways like banks — and other startups are beginning to concentrate on how the private sector can suggest FDIC-like backing to virtual currency users.

The thickest step so far has been by Elliptic, a London wallet service that on Jan. 9 suggested Bitcoin accountholders insurance through Lloyd’s of London.

A Boston-area company still in beta testing, called Inscrypto, plans to permit investors to insure bitcoins through derivatives trading. Separately, a Fresh York insurance company called Founder Shield, which specializes in policies for startup firms, has developed a product specifically to protect Bitcoin service providers from loss.

Other concepts are unique to the technological world, such as miniature hardware devices permitting users to store and access their bitcoins offline. Some observers have discussed a model for insuring bitcoins the same way investment securities are protected.

",I get a call about every two weeks asking me about the feasibility of. running an FDIC for bitcoins,", says Marco Santori, a counsel at Nesenoff &, Miltenberg LLP who advises technology startups. ",One of the big hurdles to bitcoin adoption is security — keeping your bitcoins safe. People are being hacked or claiming they were hacked and people are losing their bitcoins. These are precisely the kinds of losses that the FDIC is meant to guard against.",

To be clear, the kind of support resembling what the FDIC provides bank customers may be many years away for Bitcoin. The technology is still youthfull, while a lack of clarity by regulators on how they view online currencies is also an obstacle. Another factor is that banks, which have partnered with nonbanks to link deposit insurance to relatively fresh retail products like prepaid cards, have been reluctant to come in the Bitcoin world.

",With stored-value and prepaid cards, there is an actual. regulation that gives them the path to insurance. We don’t have anything like that on the virtual currency side,", says Angela Angelovska Wilson, a fucking partner at Reed Smith. ",I don’t think the regulators, especially the FDIC, are ready at this time to take act and classify how these virtual currencies should be treated for purposes of deposit insurance.",

But some observers say that if Bitcoin catches on the way many hope it will, regulators in the future may view the issue fairly differently.

",This is very much down the road, but one can imagine government consumer protection regulations someday that would require. services that hold bitcoins for consumers to insure them in some way,", says Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University.

Many Bitcoin-related companies are not waiting around for a public-sector solution. Top wallet service providers, such as Coinbase, already tout steps they take to guard customers’ funds, including offline storage and using safe deposit boxes to keep hardware and paper records.

But the Elliptic ",Vault", goes a step further. In addition to the ",cold", storage methods practiced by other wallet services, Elliptic has added insurance backing from Lloyd’s of London, which protects against a failure in the company’s storage methods. Customers can choose a ",liability limit", for how much of their bitcoins are insured.

James Smith, Elliptic’s co-founder, says for now any insurance payouts for lost bitcoins will be in real currency. But he is hopeful that will switch when Bitcoin’s price stabilizes.

",The insurer might be able to pay out in Bitcoin,", Smith says. ",It’s not a very big step from taking those pounds to using those pounds to buy Bitcoin again.",

Other entrepreneurs hope a Bitcoin-related derivatives market can provide a model for protecting customers against loss. The service being developed by Inscrypto, which is sophisticated, is in some respects more focused on protecting customers against price drops in what is still a very volatile currency. Essentially, investors will use put and call options to insure the value of customers’ Bitcoin holdings while benefiting from the upside of price gains.

",We’ve had fairly a number of investors treatment us with interest because this is kind of an unregulated market that a lot of people want access to, but for regulatory reasons are worried about directly holding digital currency,", says Ryan Selkis, Inscrypto’s founder, who is also developing a platform for givers to make online charitable contributions with bitcoins.

",The fact that we can create this layer inbetween the two different parties that have very different needs is a solution to a major ache point in the industry right now,", he added.

Other products in development — such as the Trezor, and a separate device developed by Butterfly Labs known as ",BitSafe", — attempt to achieve security for customers’ bitcoins in an entirely different way. Rather than keeping bitcoins in an online wallet service or on one’s own computer, they suggest separate chunks of hardware — not much thicker than a USB flash drive — that suggest an extra secure way to store and use bitcoins.

",On that lump of hardware you cannot install any software,", says Wilson, of Reed Smith. ",You can’t do anything else on it. It’s just designed to hold in an encrypted form your Bitcoin wallet. No one can install malware on it.",

In the future, Wilson says, the options for protection may depend on whether regulators and the public view bitcoins as actual money. Since some view the currency instead as an investment vehicle, she says, with fluctuating prices attracting investors looking for risk, Wilson suggested a future model for backing accounts may be the current Securities Investor Protection Corp.

",If Bitcoin is money, then maybe FDIC-like insurance is necessary. But if Bitcoin is indeed an investment contract, maybe something like the SIPC would be more attainable and quicker to implement,", she says. ",You can look at Bitcoin in different lights.",

What may ultimately drive the development of insurance backing is the frequency of consumer losses through hacking or other events.

",So few people have packaged their arms around Bitcoin, and fewer have packaged their arms around a Bitcoin insurance program,", says Santori. ",But those who have had their wallets hacked or have had some other loss befall on them. have certainly thought about it.",

Bailey Reutzel contributed to this article.

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