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It also shows what happens in an environment without insurance. If Mt.Gox was insured, this catastrophe would have been avoided for the customer by either the

• glesica 13y ago
  Which is why government insuring bank deposits isn't such a crazy idea. If the government collapses and can't stand behind the policies, then you have some really big problems on your hands and it is likely that private insurers wouldn't have fared much better. If the government doesn't collapse, everyone gets made (more or less) whole again. Basically, when the government is your insurer, there is no "Who insures the insurer?" problem, or at least the problem becomes moot.
  • TrainedMonkey 13y ago
    Right, because if government does not collapse there is nothing stopping them from printing all the money they need to cover their obligations.
    • baddox 13y ago
      Your point illustrates why government-backed currency is also a bad idea, at least when competition from private currencies is prohibited.
    • skue 13y ago
      The consequences of printing excess money during major financial meltdowns is something famous Nobel laureates still debate. The consequences of letting large segments of the population lose their life savings is a bit starker.
    • joe_the_user 13y ago
      Exactly, The first point that's not quite understood is that this generally stops the bank run because people don't feel worried about their money anymore (or not all given existing state insurance). The second point is that the "inflation of funds" actually didn't happen at the point when government printed money but at the point when the private institution multiplied the perceived amount of money in the system. Think about it, people that are withdrawing their money during a bank run don't suddenly feel richer. The third point is that banks can and have operated fractional reserve systems using gold just as MtGox seems to have done with bitcoin. 19th century US banks printed their own gold certificates and failed on a regular basis.
      • dredmorbius 13y ago
        The second point is that the "inflation of funds" actually didn't happen at the point when government printed money but at the point when the private institution multiplied the perceived amount of money in the system. J.K. Galbraith refers to this as the "bezzle" in The Great Crash: 1929. It's the monetary surplus created by fraudulent transactions, and, he notes, nobody has a problem with it until reality asserts her presence. Update: More on the bezzle, found an online reference. In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country’s businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks... Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed. Most important, the collapse in stock values made irredeemable the position of the employee who had embezzled to play the market. He now confessed. J.K. Galbraith, The Great Crash: 1929, pp 132-133. http://www.goodreads.com/work/quotes/1466583-the-great-crash-1929 http://www.goodreads.com/work/quotes/1466583-the-great-crash... And the association between Galbraith's bezzle and Bitcoin / Mt. Gox has already been made: http://www.newyorker.com/online/blogs/johncassidy/2014/02/bitcoin-falls-victim-to-galbraiths-bezzle.html http://www.newyorker.com/online/blogs/johncassidy/2014/02/bi... For now, though, Bitcoin, like innumerable speculative vehicles before it, appears to be falling victim to what John Kenneth Galbraith, in his book on the 1929 stock market crash, referred to as “the bezzle.” In any economy, Galbraith noted, crookery and theft are present. But, particularly when money is plentiful and financial markets are rising, “the rate of embezzlement grows, the rate of discovery falls off and the bezzle increases rapidly.” It is only after the market falls and “audits are penetrating and meticulous” that much of this chicanery is uncovered.
    • bunderbunder 13y ago
      Yup. And if they print so much money that it becomes worthless, then that'll have a similar impact on lenders than if they just default, which is the government's first option and everyone else's only option. The government's only option, too, if the debt is denominated in someone else's currency. To that extent, governments having the option to print money to satisfy debts is a good thing. As soon as there are two evils to choose from, it becomes possible to select the lesser of them. In other words, don't think of lending money to a government in a currency it can't debase as if it were somehow less risky. There's still plenty of risk, it's just that it comes entirely in the form of default risk rather than as a mix of default risk and exchange rate risk.
    • gus_massa 13y ago
      If you want a real word example, you can read about the Corralito ("child's playpen") in Argentina in 2001: http://en.wikipedia.org/wiki/Corralito http://en.wikipedia.org/wiki/Corralito
  • smsm42 13y ago
    >>> it is likely that private insurers wouldn't have fared much better. Why is it likely? There are many private companies controlling amounts of money comparable with amounts of money controlled by some governments. I'm not talking US government of course but there are many smaller ones. Such companies are usually multinational corporations carrying much less local political risks and less prone to engaging in stupid things like trying to build communism or invade neighboring country to steal their supply of goats. >>> If the government doesn't collapse, everyone gets made (more or less) whole again. That is certainly not so, since unless you are controlling world reserve currency (read: US government) your resources are limited unless your deposits are nominated in your local currency. If you have monetary crisis, local currency quickly becomes worthless. Thus, you have very limited resources for making your citizens whole. On the contrary, big multinational corp would usually have balanced deposits in many major currencies - and usually good political ties with US and EU governments - which would ensure any local currency risk would be survivable for it. Thus, for a private corporation it would be much easier to make everyone whole - unless we're talking about US government. So, for most governments out there which are smaller than US government, it is not true that their form of insurance is preferable for those reasons. The only reason it may be preferable is that the government has monopoly on violence (at least until overthrown) and thus can extract money by coercion, which private corporation usually can't. But if your government has to resort to robbery, are you sure it's a good insurance?
    • beagle3 13y ago
      > Why is it likely? There are many private companies controlling amounts of money comparable with amounts of money controlled by some governments. You assume complete rule of law is maintained in the absence of government, which is a non-trivial assumption. To exercise control of said money, especially in times of turmoil, you need an underwriter, usually in the form of police and/or army, which usually require the government to be functional. > But if your government has to resort to robbery, are you sure it's a good insurance? It's a game of semantics. Some people consider any taxation "robbery at gunpoint". Most people would consider that only about "unjust taxation". However, the number of definitions of "unjust taxation" is close to the number of voters.
• patio11 13y ago
  Mt. Gox tried to secure insurance of customer deposits. Japanese insurance companies asked them about the specifics of their business and then said, to paraphrase, "Oh HELL no." One of the issues was that they were awaiting guidance from the Financial Services Authority, because insurance companies hate uncontrolled regulatory risk. The other issues were the sort of thing which will get your Errors and Omissions insurance application circular filed regardless of whether you're running an exchange or running a web development shop. E&O insurance is surprisingly simple to understand. You fill out a 5ish page application, which asks you about the character of your business, your tech infrastructure, and your procedures/policies/etc regarding particular risks. The underwriter reads your application then asks some drilldown questions. The two I got were "Confirm Mr. McKenzie has 5+ years of professional experience in system administration" and "Confirm that the use of Appointment Reminder in a hospital is for the hospital's business administration or the convenience of patients, rather than for treatment/diagnosis/etc of a medical condition." (Translation: If it breaks, does anyone die? If so, we will probably not write this policy.)
  • pktgen 13y ago
    I'm curious if this is due to Mt. Gox not trying hard enough. Recently a Bitcoin startup was able to obtain insurance from Lloyd's: http://arstechnica.com/business/2014/01/backed-by-lloyds-of-london-new-uk-startup-offers-insured-bitcoin-vault/ http://arstechnica.com/business/2014/01/backed-by-lloyds-of-.... If this theory is true, presumably Karpeles would not have done this after the 2011 hack, because that would be insurance fraud (falsely obtaining insurance on the theft of coins that have already been stolen). It's possible that it would have been more difficult at that point because of Bitcoin being less mature.
    • oscilloscope 13y ago
      Insuring Bitcoin in 2011 sounds like a scam already.
      • singlow 13y ago
        It is not insuring the value of bitcoins, but the operation of the company. Regardless of the legitimacy of bitcoins or their value, the company is providing a service and it can be insured against lawsuits for its own mistakes. In 2011 the potential losses for its mistakes were much lower.
• joe_the_user 13y ago
  It also shows what happens in an environment without insurance. I'm not sure why you raise this issue considering it's effective meaninglessness. There are a raft of private insurance entities for things like pension funds and stock brokers (there used to be ones for state level "Thrift" banks. There used a mortgage bond insurance company too - it became insolvent in 2008. The pension and stock broker ones stay solvent by not necessarily fully guaranteeing any entity, etc). None of the finance institution insurers are going to be large enough to actually insure against systemic failure. Essentially, these entity also, in supreme irony, operate with the fractional reserves principle. They only insure against a small failure every once and a while. Only the state, with it ability to print money, can provide real insurance for things that operate like a bank. So private financial failure insurance is a fancy fig leaf, it gave no comfort during 2008 crisis, etc. And fricken really insure bitcoin exchanges? They would have to have enough dollars just sitting around doing nothing to do that and no one would provide these dollars. At best, all you're doing is asking for someone to sue if things go bad (OK, that's something but not much).
  • anigbrowl 13y ago
    Insurers buy insurance from reinsurers, and this works quite well most of the time. Sure, government is the insurer of last resort in situations like the 2008 financial crisis, but that sort of systemic failure tends to only occur at generational intervals. In the meantime, governments also impose things like capital adequacy ratios and so forth to avoid bailout situations, even though banks don't like those very much. I think you're taking the example of a systemic failure to mean that all such insurance is a waste of time. But most failures aren't systemic or massive.
    • joe_the_user 13y ago
      I think you're taking the example of a systemic failure to mean that all such insurance is a waste of time. But most failures aren't systemic or massive. It seems implausible that systemic failures for bitcoin in particular are going to be generational. Insurance for entities subject to systemic failure is about having many hands looking the process and having the appearance of solidness. Appearance really is as important as reality for keeping such entities afloat. You gotta admit "Insurance works most of the time" is kind of like a tight rope walker saying "that net that's there to catch me works most of the time, meaning that it definitely works when I don't fall and it makes people happier". And my main point would be that state regulation and guarantees are the more serious measures and private insurance is not nothing but fairly weak affair. I'd trust regulation on a financial entity much more than I'd trust insurance on such an entity.
• deleted 13y ago
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• mathattack 13y ago
  Insurance only helped so far in the Mortgage market... Most of the monoline (Mortgage-only) insurance companies went belly up.
• stcredzero 13y ago
  It also shows what happens in an environment without insurance. If one thinks long and hard about this, one might conclude that the entity insuring such exchanges needs an entire agency of men in black, a standing army, some nuclear missile subs, and hundreds of billions, if not trillions, in reserves. Or, it could be another kind of organization of comparable power. If I were the leader of an oil-rich state, I'd look into a system of bearer bonds based on cryptocurrency. Some alliance of nations might be able to become the virtual Switzerland of the 21st century, not with mountains to protect it, but complete dispersion and redundancy of its financial resources instead. Actually, the entity best suited to back, insure, and police a cryptocurrency is the United States. A hybrid fiat/cryptocurrency with those kind of resources behind it would be invulnerable. However, this would just increase the hegemony of the US. (Ironic, that the US could further cement world domination by losing control of individual transactions.)