Bitcoin exchanges and wallet services have been vulnerable since the start. The protocol's decentralized design removes intermediaries from money storage, yet merchants and traders still need to buy a
Bitcoin exchanges and wallet services have been vulnerable since the start. The protocol's decentralized design removes intermediaries from money storage, yet merchants and traders still need to buy and sell in seconds, not minutes. They need access to the asset without delay.
Several U.S. exchanges have begun offering dollar deposits backed by FDIC insurance, giving customers confidence that their funds will remain safe. When your money sits on an exchange, you need that certainty.
Anyone trading or using bitcoin for commerce wants assurance. If you deposit dollars with an exchange, you should expect those funds to stay protected. Now some places provide that guarantee.
FDIC insurance changes the equation for merchants using bitcoin. Payment processors like Coinbase and BitPay have made it easy for merchants to accept bitcoin without exposure to price swings. But those payments convert to dollars and get transferred to traditional bank accounts. The merchant leaves the bitcoin world behind. Later, if they want to use bitcoin for payments, they have to buy it through a separate service.
An FDIC-insured exchange offers another option. A merchant can hold dollars directly on the platform with insurance protection. This simplifies the process of using bitcoin for future expenses. Instead of purchasing bitcoin through a separate platform or process, the merchant converts dollars to bitcoin on the same exchange where they already have funds sitting.
Paul Sztorc, a developer at Truthcoin, explored these questions in recent correspondence about bitcoin as a store of value. He weighed in on the volatility problem: "Financial derivatives can substantially reduce Bitcoin's volatility problem (forward contracts, calls/puts/leverage). If they're so great, where are they? Part of the problem is exchange risk (exchange can run off with your money) which stalls the entire fiat <-> BTC exchange process. For example: if I were trading I would withdraw any BTC immediately (would never log off an exchange with my BTC/cash still on their website). This thins and slows the markets. Regulatory holdup, etc."
Sztorc offered thoughts on cash management as well. Businesses "shouldn't hoard cash," he said. He referenced the cash conversion cycle and commercial paper as examples. Companies work hard to keep cash holdings low. They use various tools and mechanisms to limit what they keep on hand.
A number of platforms have introduced FDIC coverage on dollar deposits. 2015 has seen Wall Street turn its attention toward bitcoin, with FDIC insurance availability increasing alongside that interest. Four exchanges or bitcoin banks now offer this protection: itBit, Coinbase (which includes the Coinbase Exchange), Circle, and Gemini.
Bitcoin itself cannot be insured through FDIC programs. Elliptic and other startups are exploring private insurance for bitcoin holdings, but most insurance companies still struggle to assess the risk of lost or stolen bitcoin wallets. Insured bitcoin deposits will have to come from the private sector for now. Xapo, Gem, Coinsetter, and similar companies are developing their own approaches to this challenge.
