Coinbase Vault Protects Your Bitcoin Hoard

The Bitcoin Economy gets a little larger each week than the week before.  Even though the price seems to be stuck in a funk lately, exciting things are happening out there.  This week, just a short time after announcing that the service was under development, Coinbase launched a new service aimed at large account holders called Vault.

Vault isn’t a new service per se, though Coinbase seems to be marketing it as such. Coinbase bills Vault as a solution for storing “large amounts of bitcoin.”  The company claims that “up to 97%” is stored offline, but this is the same figure given for customer funds in general, so nothing new here. Incidentally, “up to 97%” would technically be a true statement even if the company only kept 10% of customer funds offline, but Coinbase doesn’t disclose what its online or customer funds balances are, for obvious reasons.

Coinbase also doesn’t really discuss in detail the conditions under which it stores offline bitcoin holdings (“safe deposit boxes and vaults around the world”) or the kinds of things the company has done to mitigate the risk of loss or theft.  One imagines a network of shifty-eyed Coinbase sleeper agents sitting on caches in places like Vienna or Bangkok, just waiting for the call that would put their bitcoins into circulation. The reality is probably much less interesting.

Bitcoin “deposits” are not FDIC insured. This doesn’t mean that the company carries no insurance, just that the rules and safeguards are not the same as for bank accounts.  This means that users could be put in a bad spot if the company were forced to shut down, especially if most of their funds were in a secret offline location.

Most security conscious bitcoiners maintain at least part of their balance in offline storage already.  This could be as simple as a piece of paper in a safe place with the owner’s public and private key pairs printed on it, as long as it is offline and under the exclusive control of the owner.  However, Vault does offer a couple of interesting features that might be of use to institutional account holders.

Vault has a mandatory 48 hour waiting period before Coinbase will release a customer’s funds.  When a withdrawal request is received, Vault notifies the owner by e-mail. A withdrawal request requires explicit authorization backed by two factor authentication before it will be honored.

Accounts can be setup to require more than one signer to accept the request before it will be processed.  For personal funds, this is probably more of a nuisance than most people will be willing to tolerate (sort of like putting your credit cards in the freezer).

For institutional customers, the waiting period may be a great way to protect bitcoin holdings from unauthorized access.  This is especially true for small companies and not for profit entities that lack the resources to develop and implement the thorough system of internal controls that larger organizations typically have.

Smaller organizations are especially vulnerable to theft and fraud, for a number of reasons. On the face, bitcoin may seem extraordinarily risky to some, since transations can’t be reversed or meaningfully traced. Vault may be one solution that makes bitcoin more attractive to these customers.

Coinbase has been criticized on occasion for the slow rate that its system processes purchase and send orders.  Normally, Coinbase benefits from its large merchant base and large consumer base, allowing many transfers to occur “off the blockchain” through internal accounting.  However, during periods of heavy purchasing activity, it is possible for online bitcoin inventory to be exhausted, forcing the company to either feed in coins from storage or purchase them elsewhere. This is likely to be at least part of the reason for slow fulfillment times at all exchanges, not just Coinbase.

Vault provides a pressure release valve, guaranteeing that some percentage of the company’s obligations won’t have to be met for at least 48 hours.  Perhaps this is part of the reason why Coinbase has decided not to charge for this service for the time being. Worth noting here is that commercial banks also do this with certain account types, since the reserve requirements are lower for non-demand deposit accounts. If you’ve ever wondered why you have to pay a fee for exceeding your withdrawal limits on a savings account, this is why.

Overall, I would say that Vault is a nice product with an unbeatable pricepoint. While not revolutionary as a secure means of holding bitcoin, the service does offer a few handy features that are likely to be especially helpful to the kinds of small organizations that Coinbase needs in order to generate operating cashflows.