Bitcoin Forum

So, I truly don't know much about how obtaining insurance for something like Bitcoin would work, but it seems like having insurance, especially on exchanges/Flexcoin/online wallets is the one thing that we really really REALLY need.

If BTC is insured, it's no longer scary.  No hack worries, no scam worries...nothing. 

Why is this so hard?

 * The insured item is intangible, which will scare off traditional insurance companies
 * The replacement value is volatile, which increases the risk to the insurer
 * Insurance fraud would be too easy: how can you prove they were stolen by a hacker and not deliberately given to your buddy to launder?

The first two could be addressed by creating a market-traded insurance instrument instead of using a traditional underwriter, but this market is way too small to develop something like that.  I really don't know what you'd do about the fraud risk.

Yes, it's a little like trying to insure the cash in your pocket. The solution is a reputable bank rather than insurance.

Insurance would be possible with complex transaction types, such as with a "2-of-3" wallet where the insurer must sign the transactions to permit the spending.  But complex transactions are out-of-reach in the current clients.

Businesses wishing to establish their reputation could post a bond.  This has been done before (https://bitcointalk.org/index.php?topic=10008.msg144414#msg144414) on a small scale.  Because the bond is denominated in Bitcoins, market volatility isn't an issue.

For example, Alice wants to start a new online wallet service.  She asks Bob (a trusted member of the Bitcoin community) to hold a 1,000 BTC bond to cover any coins lost or stolen from her new online wallet service.  Bob generates a Bitcoin address, Alice sends the coins and Bob posts the address for all to verify that the coins exist.  If Alice loses any coins, Bob replaces them from the bond funds.  There are hundreds of variations on the basic idea.

I've held bonds like this.  I recall theymos holding a bond for someone.  It allows new businesses to leverage existing trust until they've acquired enough of their own.

While it might work on a small scale, the bond would represent a smaller percentage of total user deposits as the wallet service/exchange grew.  It would be more meaningful if the bond increased as deposits increased, but no service is going to tell people the total amount of user deposits they're holding at any given time.  

FWIW, Crypto X Change has posted that they have liability insurance. 

https://bitcointalk.org/index.php?topic=48226.msg576459#msg576459

I don't this will ever happen to bitcoin, but,
Let's say Bitcoin is adopted and insured by a major bank, does that mean BTC is no longer decentralized? which is one of the major selling point for BTC.

Just cause your coins are insured by a bank doest mean mine our, its still decentralized.

One thing is insuring people's coins. Another thing is insuring the coins in an e-wallet against things like what theoretically happened to MyBitcoin and Bitcoin7.

The latter could eventually be done, but yeah, it would probably be difficult (=expensive).