Coinbase congratulated itself this week for being insured against loss, something that nearly every business in the western world (outside the bitcoin ecosystem) considers to be the minimum standard. The bitcoin trading platform announced in a blog post that some of its customer holdings are insured against incidents of loss due to “breach of physical security, cyber security, or as a result of employee theft” (emphasis mine). The policy, issued by AON PLC*, has been in force since last fall and is described as being of a value that is “greater than the average amount of customer bitcoins” in the company’s hot wallets. Presumable, coins in cold storage are not covered.
If you’re getting excited already, be advised that the insurance carried by Coinbase is materially dissimilar to FDIC insurance. The scope of circumstances under which the policy will pay out is extremely narrow. Coinbase admits that the policy is subject to “standard policy exclusions.” Here are a few examples of events that probably would not be covered:
- Malfeasance perpetrated by Coinbase in which coins are not “stolen,” but misappropriated with the implicit or explicit approval of management.
- Mishandling by Coinbase employees, such as inadvertent destruction of media containing stored bitcoins.
- Any circumstance in which cold wallets stored on paper or electronic media are destroyed, to include hurricanes, tornadoes, floods, landslides, earthquakes, cthulu visits, volcanic eruptions, lightning strikes, alien attacks, war, civil unrest, or fire.
- A state sponsored or sanctioned seizure of servers containing customer owned bitcoins (in connection with an investigation, for example).
- A total failure of Coinbase as a going concern (i.e. a Mt. Gox type collapse in which all or most customer assets are lost).
Just because you can’t have everything, doesn’t mean you shouldn’t do anything. In spite of my snark, I think this is a giant step in the right direction, not only for Coinbase, but also for the bitcoin economy. The fact that a major player in this industry sought insurance coverage without being forced to do so by regulators and was able to obtain it at a price that the company could afford is a big deal. Now that Coinbase has set the standard, perhaps other platforms will follow suit.
*Full disclosure: my accounting firm is insured against professional malpractice by this carrier.