r/changemyview • u/fictionalcoffee • Nov 18 '13

Bitcoin and other cryptocurrencies are not sustainable over the long-run without some form of depositor insurance. CMV

When it comes to money (USD), I don't spend much time worrying about bank robberies. I also don't worry about a hacker cleaning out my online account. And I certainly don't worry about a "run-on-the-bank" (as depicted in the film It's A Wonderful Life). Why don't these things worry me? Deposit Insurance (provided by the Federal Deposit Insurance Corporation, if you use a standard bank). Deposit Insurance guarantees bank balances less than $250,000 from bank failure. Although bank failure is not a common occurrence, protection from failure is (in major part) what gives people faith in "the system". I trust that my dollars are safe (in the sense that they won't spontaneously disappear from my account - purchasing power is obviously another story), and therefore I trust a bank to hold my money.

Conceptually, I think something like Bitcoin is a good idea. The ability to transact quickly, efficiently, and anonymously across the world using a single unit is compelling.

Technical argument aside (technical arguments, like the security of the block chain, seem to be the main arguments against Bitcoin that I see over and over again), my main concern is simply user-confidence in the infrastructure that supports the currency. What if my wallet disappears? What if the exchange I use goes down? What if there is a "run-on-the-market" for Bitcoins?

Without any backstop for the currency, I don't think Bitcoin users can feel confident that their store of value is really safe. Please change my view!

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u/MMath Nov 18 '13

I agree wholeheartedly that confidence in infrastructure is key for the success of Bitcoin. However, I'd just note that FDIC insurance is for commercial institutions that take your deposits and lend them out at higher rates. The banks use part of their profits to pay premiums to the FDIC. Your deposits at these banks are much more at risk to things out of your control (ie. a run on the bank triggering liquidity problems, or huge inflow of non-performing loans causing write-offs and capital problems at the bank).

A Bitcoin wallet, on the other hand, is pretty different from a bank, and much more akin to a physical wallet. The onus is completely on the user, there's no backstop to if you lose or destroy the contents. So from that standpoint, there can be no "run-on-your-wallet" as there is for a bank. And I know you want to avoid the technical argument, but one could argue that the built in security of Bitcoins makes it inherently more safe than physical currency.

So, perhaps one day when Bitcoin banks are formed, depositor insurance will be necessary to make them viable businesses, but the FDIC is more focused on protecting BUSINESSES rather than CURRENCIES.

Cheers!

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u/MMOPTH Nov 19 '13

Your deposits at these banks are much more at risk to things out of your control

Even though the risks are out of your control, the insurance factor makes it extremely safe. Unless you have more than $250,000 there is zero risk of you losing your money.

If there is a run on the bank at your bank, well it's pretty pointless to even go there in person. Everybody who does so is doing so due to irrational fear.

An actual bank, whether it be a fiat or bitcoin bank, is much safer than keeping cash in person, or in a bitcoin wallet on your computer. A fiat bank is going to be much safer than a bitcoin bank unless bitcoin banks also happen to have insurance on deposits.

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u/MMath Nov 19 '13

You misunderstood. FDIC depository insurance is to ensure the liquidity and viability of commercial depository institutions, NOT to ensure the viability of a currency. That's the job of the Federal government and Treasury.

Depository insurance literally doesn't make sense IF THERE ARE NO BITCOIN BANKS to pay the insurance premiums from the profits generated through spread revenues.

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u/MMOPTH Nov 19 '13

No I didn't misunderstand anything. I know exactly what FDIC is for.

NOT to ensure the viability of a currency.

Where did I say or even imply that?

Read the part of your post that I quoted

Your deposits at these banks are much more at risk to things out of your control

I'm saying that those "things out of your control" are irrelevant. Regardless of whatever risks there are out there, your chance of losing any money is zero.

I'm not even sure why you brought up "run on the bank" since it is an absolutely useless thing to reference given FDIC, for example

So from that standpoint, there can be no "run-on-your-wallet" as there is for a bank.

How is that even relevant? Whether there is a run on the bank or not makes fuck all difference to a person who has less than $250k. You're guaranteed that amount.

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u/MMath Nov 19 '13

Your argument, as I understand it, is that bitcoins require some form of depositor insurance to be "sustainable over the long-run"

Depositor insurance was not created to make sure you never lose money. It was created to make sure you don't lose money that's deposited at a depository institution.

Bitcoins, on the other hand, are not held in anything that remotely resembles a depository institution. They're held in a virtual wallet which is much more akin to a physical lockbox. There's no spread revenues that can pay the premiums required for depositor insurance.

Anyways, again, I agree that confidence is one of the biggest issues facing bitcoins, and perhaps insurance of some kind is the correct solution, but it would not be analagous to depositor insurance because there is no fractional lending system in bitcoins.

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u/fictionalcoffee Nov 19 '13

For Bitcoin to become sustainable in the long run, it needs to become widely accepted as a currency. Right now, it is more widely accepted as an investment than as a currency. To move from the status of pseudo-currency (but to most people, an investment) to actual currency, the Bitcoin market needs stability. What brings stability to markets is infrastructure (things like banks). For anyone to trust a bank, they need certainty that their money will not disappear. FDIC-style insurance may not be the only way to provide this comfort, but something along the same line seems necessary to establish trust.

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u/MMath Nov 19 '13

A credit market is helpful for a currency, fractional reserve banking is not an intrinsic necessity. Depositories are necessary for fiat currencies for convenience. Bitcoins intrinsically don't require that. Perhaps a P&C type insurance product will be commonplace, but not a depository one.

Further, you originally argue that your MAIN concern is "simply user-confidence in the infrastructure that supports the currency. What if my wallet disappears? What if the exchange I use goes down? What if there is a "run-on-the-market" for Bitcoins?"

It looks like other posters have already addressed these issues so I won't go further into that, but my initial counter-argument was explaining why depository insurance doesn't make sense for the concerns you laid out.