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.
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.
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.
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.
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.
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
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