By: Julien Sobrier

Bitcoin: Regulations And Security

Compromise

You have probably heard about Bitcoin, a relatively new virtual currency. It made headlines recently because it is starting to present a real alternative for traditional online payments, and has recently experienced wild swings in value.

One of the advantages of Bitcoin is the lack of regulation, which means it is largely free from the rules and regulations that govern banks and payment processing companies when dealing with "real" currencies. Payment transfers are also fast and free.

For me, Bitcoin actually highlights the benefits of strong regulation, which protects consumers.

Your Bitcoin Wallet is Actually Your Bank

Bitcoin users keep their currency in a Bitcoin "wallet". I think wallet is really a misnomer, it should be called a Bitcoin Bank since it holds all of the users currency, not simply want he wants to spend in the near future. A Bitcoin wallet is unsecured like a regular wallet - money can be stolen and the user as no recourse.

People don't hold all their savings at home because they know that doing so is not safe. Instead, they put their savings into a bank which offers protections, including being FDIC insured. However, many Bitcoin users keep all their Bitcoins on their own computer or mobile device. They are on their own to keep their system secure and have no insurance to cover loses, whether unintentional, or due to breaches in security.

There is nothing equivalent to a credit card in the Bitcoin world. While credit cards impose a fee on all transactions, they do provide significant protection to consumers. They allow people to carry and transfer money (like the cash in a wallet), while still benefiting from the strong protection of a bank. If a personal credit card is stolen and used, the owner will be reimbursed. The owner can also dispute charges and get reimbursed quite easily if a vendor does not deliver the product or service once paid.

Bitcoin users bear all the risks and we've already seen plenty. For example, there has been malicious software designed to steal from Bitcoin wallets. Recently, a malicious site faking a well known Bitcoin exchange contained an exploit that transferred money out of the Bitcoin wallet when users visited the site. There have also been many trojans and worms focused on stealing Bitcoins.

No Secure Bank

Bitcoin users can opt for storing their money in online Bitcoin Wallets. These could be construed as the equivalent of Online Banks...but without the insurance and security! Due to the absence of regulation, these online wallets don't have to adhere best security practices, have no audits and no certifications. It should not therefore come as a surprise that many Bitcoin online wallets have been hacked.

In one occurrence, the online Bitcoin wallet was hosted on a VPS (Virtual Private Server), which is a shared resource. This would have never been allowed for a bank. The attacker stole about $228,000 worth of Bitcoins at the time.

Just this month, InstaWallet was hacked. Users lost their Bitcoins and no insurance company will be reimbursing them. All is lost, forever.

While Bitcoin has some advantages, the risks of storing the money is just too high. Online wallets and exchanges can't be trusted as too many of them has shown to be run in a very unprofessional and insecure manner. Every time, the users pay the price.

If you can't keep your Bitcoin wallet encrypted and split onto 3 different secure USB keys in 3 different safes like the Winklevoss twins, Bitcoin is probably not for you.

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