Why The Bitcoin Industry Must Recognise Its Responsibilities

The biggest lesson of the fall of Mt. Gox and Flexcoin is that customers must be better protected.

AccessTimeIconMar 8, 2014 at 2:47 p.m. UTC
Updated Dec 12, 2022 at 12:46 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

Michael Jackson is a software engineer, entrepreneur and venture capital investor at Mangrove Capital Partners. He is also the former COO of Skype.

The most significant issue affecting the adoption of cybercurrencies is the safety of bitcoin holdings.

This is a fundamental deficiency of what is a software-defined asset, totally accessible instantaneously and online. In short, bitcoin’s very characteristics make it too easily accessible for criminals.

Last week we saw Mt. Gox cease to exist, this week Flexcoin. Both closures caused by errors in the companies’ systems, but with likely no recourse for their customers.

We will see more companies go under in this way, without a doubt. So if bitcoin is to widely adopted, the customer must be better protected.

Consumer protection

With existing currencies, you know that if a bank goes down, you are protected and will likely be refunded. In this case, you can say, the balances in the bank (which are effectively virtual too) are zeroed and then reissued by the central bank.

There exist other examples of consumer protection too. In the case of the travel industry, operators pay into a central pool that can be used for compensation in the event of a travel company collapsing. Those that pay into the pool are able to use the consumer protection badge, giving consumers the assurance they need to pay up front for their holidays.

Industry-backed consumer protection schemes are not new. In order to ensure consumer protection and regain trust, we need a similar scheme for digital currencies. By working together to define the criteria for accepting businesses into the scheme and sufficiently vetting each business, the same could be done for bitcoin.

Traceable coins

Of course, some environments are simpler than others. Charter holidays are relatively straightforward while bitcoin is, in practice, much more complex.

The protocol means that while it is easy enough to prove that you own a bitcoin, it is much harder to prove that the original bitcoin has disappeared and that a refund is therefore due.

Bitcoins held by Mt. Gox have seemingly disappeared, but they may still reappear. If this happens, perhaps what is required is a central body to return these bitcoins to Mt. Gox customers.

Some may argue that bitcoin is an ideology as much as a product – an ideology that would be totally destroyed if a governing body was given the power to control it.

Case study

However, the Internet itself has proven huge decentralized projects can be workable. If there are disputes regarding Internet governance or protocols, they can be escalated so that decisions are made for the greater good of the Internet.

In this case, this is possible because the web is such a large, diverse entity with no single self-interest.

Just now, it is not clear where the responsibility lies and it is important that the open-source nature of bitcoin is preserved – where the only self-interests are those that are building applications and services on top of the cryptocurrency.

The Bitcoin Foundation could be a good option – it has the right structure. With many of those involved having significant self-interests – half of them own exchanges of their own – this could be a good thing, as they will be motivated to regain the trust of bitcoin users.

New challenges

As is often the case with bitcoin, asking one question raises many more. Yet while there is still so much to be worked out, many of the challenges arising are not ones that haven’t been overcome before.

Similarly, there are many other technologies that were once unproven or unpopular, but are now multi-billion-dollar industries. It’s clear, however, that it will require effort, investment and trust between the various different components to take bitcoin forward.

Without renewed effort to gain consumer trust, this industry may die before it even reaches childhood. All bitcoin companies need to collect a levy, used to compensate unfortunate consumers. Some would call this a tax. Maybe bitcoin isn’t so far from the real world after all.

Consumer protection image via Shutterstock

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.