Mar 292014

Bitcoin Insurance

With Bitcoin going more and more mainstream every day (irrespective of the price. Seriously, stop obsessing about the price, up or down!), as a financial instrument (currency/commodity/thing of value/I-have-no-idea-what-it-is-but-I’ll-speculate) it’s only a matter of time before Bitcoin insurance comes along. Well, it sort of already did, and it’s a matter of time before bigger players enter the market. This is an interesting development, considering Bitcoin is still a beta software!

Also, Barry Silbert, the founder and CEO of Second Market had this to say on Twitter recently:

(Interesting. We’re starting to get approached by large, well-known insurance cos looking to offer insurance products on bitcoin exposure)

This is a positive trend for Bitcoin, but just so the Bitcoin insurance companies know, insuring Bitcoin is nothing like insuring your car or insuring your gold supply. It would be very interesting to have an insurance claim on Bitcoin tested out in a court of law. Anyway, here are some things these companies need to think about –

  • Simple thefts: This seems like the primary motivation of the Bitcoin insurance companies. If there was a hacking theft or employee theft, I assume the insurance pays out. It’s trickier though – how do you really prove a hacking theft? The owner might simply transfer them to another wallet and claim he was hacked.
  • Partial key theft: An interesting situation where an insider is able to leak a part of the key (e.g. the one which he has access to) and then sells it on the black market and a powerful computing pool is able to crack the remainder of the key and steal all the Bitcoins. Note that the private key wasn’t ‘stolen’ in this case, but instead brute-forced with the help of some insider information.
  • Key loss: Proving a private key is lost can be tricky. How and when would this insurance pay out if a key is claimed lost?

There are also many unexpected scenarios that the Bitcoin insurance needs to be aware of, which might or might not directly impact the payouts –

  • Hard Fork: It has happened in the past but was quickly resolved. However, with so many interested parties in Bitcoin now that have a considerable investment, it isn’t out of the realm that there’s a hard-fork that cannot be reconciled. For instance, when Mike Hearn pushed for blacklisting of coins, the whole community erupted in opposition. If such a feature was to be implemented, the people close to governments and regulators might welcome the money and many others wouldn’t. There was already talk of forking the Bitcoin blockchain in that case. There’s no ‘main’ chain in that case – there would be two different chains, each one valid and I assume each one very well protected by hashing power. It’s a situation to think about at least.
  • Miner Blacklisted Coins: If the scenario above happens, or even if it doesn’t, the Bitcoin miners have a lot of control over which transactions are added to the blockchain. What if the most powerful players in the very centralized Bitcoin pools decide to block transactions from certain addresses to be processed? It seems unlikely that individual parties can ever conjure up enough hash-power to add to the blockchain themselves. It would be an interesting scenario – the Bitcoins are still present and not stolen, but there is no way to ‘spend’ them.
  • Lost Fungibility: Today, Bitcoins are more or less fungible, in that any Bitcoin is the same as another. However, ideas like Colored Coins would destroy fungibility. Such a situation would mean one Bitcoin is different from another. There are a plethora of issues that need to be thought about in such cases. This also applies to legal frameworks – since the blockchain is public, there could be cases where certain Bitcoins associated with some addresses, for whatever reasons are not considered fungible with the rest of the network due to specific laws in that country.

What other issues could Bitcoin insurance run into or should at least think about?

Photo Credit: Gabriel GM

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