IDEA: Bitcoin Insurance Agency - Insuring all liability

[legolouman]

Amiss all of the scams, Ponzi schemes, fraud, deception, and trust based investments we all see here in the community we've come to be very weary with anything concerning our hard earned Bitcoins. Between using escrow, trusting only respected members, and even getting credit ratings from some members, there still is nothing to fall back on in the event you get burned.

What Bitcoin needs is an insurance company, that is able to access the risks and liability involved with any purchase, trade, or investment and is able to back that with coin.

In a thread concerning trusting Casascius due to the coins he holds, Casascius said this:

There is a reasonable likelihood that, as BTC price rises, that that risk could be made insurable.  As the value of BTC rises, the business case for someone to come along and pledge for a fee to make you whole if I scam you becomes more and more sensible.  That person or business entity may be in a position to satisfy themselves that such a loss will either be impossible or recoupable, and make a profit on that position.  If BTC rises x1000, those coins are going to be worth a hell of a lot more than 1BTC intact.

I understand that PatrickHarnett rates and insures sellers and investors, there is no one there in the case of a tangible object or other scam. I suggest that we as a community fill that hole.

Is there an interest for a service like this? Obviously, this could be very high risk to invest into and start, could it be done properly? I'm eager to see where this could go.

[SgtSpike]

An insurance company would have to charge 100% of the value of the investment every 6 months to even break even in this sort of community.

Investments need to be lower risk for insurance to be viable.  Or, the insurance company could only offer insurance on investments it deems to be low enough risk to offer viable interest rates on.  But then, if the investment is that low of risk, why would anyone need insurance?

Insurance exists to reduce volatility for a fee.  Given that we're all quite used to a great deal of volatility, I just don't see it as particularly useful here.  Everything that might be considered a high-risk investment among the Bitcoin community is such high-risk as to not be viable for insurance.

On top of all of this, the insurance co would need quite a substantial (proven) backing of capital.

[lunette]

An insurance must be able to calculate the risks (and with these data the fees) with the help of statistics. The number of incidents during bitcoin investments is too small for statistics.

[legolouman]

An insurance company would have to charge 100% of the value of the investment every 6 months to even break even in this sort of community.

Investments need to be lower risk for insurance to be viable.  Or, the insurance company could only offer insurance on investments it deems to be low enough risk to offer viable interest rates on.  But then, if the investment is that low of risk, why would anyone need insurance?

Insurance exists to reduce volatility for a fee.  Given that we're all quite used to a great deal of volatility, I just don't see it as particularly useful here.  Everything that might be considered a high-risk investment among the Bitcoin community is such high-risk as to not be viable for insurance.

On top of all of this, the insurance co would need quite a substantial (proven) backing of capital.

I understand what you are saying, though I don't think that 100% face value would be required. If the insurance company fully investigated the investment before determining a rate, would it be more reasonable?
While I don't think the company should go around insuring the next Pirate scandal, situations like:
- New pool starting out
- Trades with a reputable, but sometimes odd trader. Like with btcguy, he was honest for the longest time.
- Too good to be true hardware, like when BFL first debuted.
- Investments into trusted GLBSE securities. The issuer of the security would be investigated.

were more along the lines of what I had in mind. Are they a bit more viable? Or would they too fall victim of being too risky, and needing a rate too high to be viable?

An insurance must be able to calculate the risks (and with these data the fees) with the help of statistics. The number of incidents during bitcoin investments is too small for statistics.

The company would have to make its own statistics based on the reputation and histories of the parties involved, what the investment is into and the like.

[SgtSpike]

My next question then, is would this be something better done via betsofbitco.in?  People can create bets to help hedge their investments, and the market itself sets the risk rate simply via the agree/disagree ratio.

[legolouman]

My next question then, is would this be something better done via betsofbitco.in?  People can create bets to help hedge their investments, and the market itself sets the risk rate simply via the agree/disagree ratio.

That is a very good application of betsofbitco.in, and while good in theory, I don't readily see enough people using that method to become a viable method, though, it would be something very cool to play with.

Also, betsofbitco.in won't let you post the bet if it doesn't have a set 'end' time. The investments might not have and 'end' time.

[blakdawg]

I think there was a recent thread re performance bonds, which is a related idea.

I am skeptical that people are willing to pay for meaningful insurance; or that the participants are willing to jump through the regulatory hoops required to qualify as a legal insurance company.

And if it's going to be some sort of offshore Tor-only SilkRoad-eque insurance company, I'm *really* skeptical anyone would be willing to pay much for it.

An alternative might be some sort of dispute resolution agreement - where members would agree to resolve disputes among themselves according to a protocol, and members would agree not to trade with people who didn't agree to the protocol (EDIT: decided this is not a good idea.). Participants (e.g., people who agreed to the protocol) would handle judgment enforcement within the system - e.g., A and B have a dispute. The arbitrator finds that A owes B 50 BTC. B doesn't have to just whine until A pays, B can go to C, D, and E (who do business with A) and demand that they turn over A's property that they are holding, or intercept A's inbound payments, until the judgement is satisfied.

People would be free to not agree to the protocol - but, if this was working, then others would refuse to trade with them, because the cost of traditional government-based enforcement is too high, that system is too slow, and the alternative is physical violence, or just walking away from a loss, none of which are attractive.

[JoelKatz]

My next question then, is would this be something better done via betsofbitco.in?  People can create bets to help hedge their investments, and the market itself sets the risk rate simply via the agree/disagree ratio.

That's not the right platform for a variety of reasons. And an insurance company won't work because the market is too immature. But an "insurance marketplace" on a platform specifically designed for that purpose could work.

[legolouman]

My next question then, is would this be something better done via betsofbitco.in?  People can create bets to help hedge their investments, and the market itself sets the risk rate simply via the agree/disagree ratio.

That's not the right platform for a variety of reasons. And an insurance company won't work because the market is too immature. But an "insurance marketplace" on a platform specifically designed for that purpose could work.

How would you suggest going about an insurance marketplace?

[Dalkore]

Read up on LLoyds of London - I have a history book on their company and before it was a self-regulated marine insurance collective run out of coffee houses and a couple pubs.   If we could actually vet some members that could really make good on claims, that model would work in the Bitcoin world.

[JoelKatz]

How would you suggest going about an insurance marketplace?

The basic idea is that you identify specific risks and then allow people to post offers to insure for or against that risk. The hard part is specifying precisely what the risks are, what the terms of the insurance offers are, and how you determine whether the insurance has to pay out or not.

For example, let's say there was a mining bond offered on GLBSE and someone wants insurance that the issuer won't default. The risk can fairly easily be identified. There would likely be a 100% payout if the bond was delisted from GLSBE or trading was stopped and a partial payout if the value of the bond dropped below some specified level, say half its average price around the time of purchase (in case there was a gradual or partial default). These are things that can readily be objectively identified. Time frames can be standardized, 30 days, 90 days, 6 months, 1 year, and people can place bids/asks for particular quantities at particular price points.

A thriving market in this type of insurance would be extremely valuable because it would provide a crowdsourced estimate of the reliability of various issuers and securities.

[MPOE-PR]

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

[legolouman]

How would you suggest going about an insurance marketplace?

The basic idea is that you identify specific risks and then allow people to post offers to insure for or against that risk. The hard part is specifying precisely what the risks are, what the terms of the insurance offers are, and how you determine whether the insurance has to pay out or not.

For example, let's say there was a mining bond offered on GLBSE and someone wants insurance that the issuer won't default. The risk can fairly easily be identified. There would likely be a 100% payout if the bond was delisted from GLSBE or trading was stopped and a partial payout if the value of the bond dropped below some specified level, say half its average price around the time of purchase (in case there was a gradual or partial default). These are things that can readily be objectively identified. Time frames can be standardized, 30 days, 90 days, 6 months, 1 year, and people can place bids/asks for particular quantities at particular price points.

A thriving market in this type of insurance would be extremely valuable because it would provide a crowdsourced estimate of the reliability of various issuers and securities.

Which basically evolves it from the idea of using BetsofBitco.in. It gives it the user the same safety as an insurance policy calculated with statistics, but without a lot of the added strings. Not to mention it lets the community determine the risk of an investment, which can give it the same sense of "easy money" associated with the betting and other popular gambling sites. I would personally use this service.

A couple of big concerns come to mind when thinking about a community like this. How large would the user base have to be in order for the service to stay active?

How would the insuring process go?

I imagine something like this:
User1 makes a request for insuring 1BTC
User2 insures User1's request 100% (being 1BTC if their investment fails) @ 50% a year
User1 accepts by sending .5BTC to User1's account
User2 sends 1BTC to an address provided by the service and is provided part one of the privkey. Is also credited the .5BTC
User1 is given part one of the privkey
Depending on the results, part two of the privkey is given to the correct party


If the community interest is there, I am committed to helping make this service happen.

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

While true, someone would have to provide insurance. As it turns out, 100% insurance is looking unlikely at any reasonable rate.

[JMAHH]

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

Good point. A combination of bitcointalk-account-bound insurance and a minimum post level for this forum could help - although it will never be 100% safe without full-on identity checks a la Mt.Gox.

[edit: what about interest rates depending on posting levels? I know it's not foolproof but at least it's workable.]

[JoelKatz]

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

Yeah, that's a big problem. But I'm not convinced it makes it impossible. You have the same problem with all GLBSE listings-- without collateral consequences (civil lawsuits, criminal charges) all kinds of stock manipulation are almost impossible to avoid. Yet people invest/gamble on GLBSE and until recently, it seemed to at least mostly work okay.

[MPOE-PR]

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

Good point. A combination of bitcointalk-account-bound insurance and a minimum post level for this forum could help - although it will never be 100% safe without full-on identity checks a la Mt.Gox.

[edit: what about interest rates depending on posting levels? I know it's not foolproof but at least it's workable.]

There exist forms of CFD (contract for difference) being used privately among the larger traders/marketmakers on MPEx which would in effect double as a form of insurance. The key aspect is that it's not offered to the public in any form, but only among a group of entities that are able to recognize each other.

So in short, the only way to participate in BTC financials insurance is to become part of a club that has both the cause and the wherewithal to do it. Along these lines your idea is in very theoretical principle workable, but I'm not so sure about any of the specifics you propose.

[legolouman]

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

Good point. A combination of bitcointalk-account-bound insurance and a minimum post level for this forum could help - although it will never be 100% safe without full-on identity checks a la Mt.Gox.

[edit: what about interest rates depending on posting levels? I know it's not foolproof but at least it's workable.]

There exist forms of CFD (contract for difference) being used privately among the larger traders/marketmakers on MPEx which would in effect double as a form of insurance. The key aspect is that it's not offered to the public in any form, but only among a group of entities that are able to recognize each other.

So in short, the only way to participate in BTC financials insurance is to become part of a club that has both the cause and the wherewithal to do it. Along these lines your idea is in very theoretical principle workable, but I'm not so sure about any of the specifics you propose.

However, that would be a calculated risk of the person insuring. Any 'safe' investment gives you a false sense of knowing who the person in charge is.

I like the idea of verification based on different sites. A user with 1000 posts here investing into someone with 2000 posts seems safe.

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

Yeah, that's a big problem. But I'm not convinced it makes it impossible. You have the same problem with all GLBSE listings-- without collateral consequences (civil lawsuits, criminal charges) all kinds of stock manipulation are almost impossible to avoid. Yet people invest/gamble on GLBSE and until recently, it seemed to at least mostly work okay.

This is true, however there is the possibility of Lawsuits and other legal consequences. Depending on how the Insurance company works, it would need to be able to handle that properly. If in the case it was more of a trading service, allowing insurance to be crowd sourced then the operator wouldn't be at fault. That works similarly to GLBSE.

[Dalkore]

How would you suggest going about an insurance marketplace?

The basic idea is that you identify specific risks and then allow people to post offers to insure for or against that risk. The hard part is specifying precisely what the risks are, what the terms of the insurance offers are, and how you determine whether the insurance has to pay out or not.

For example, let's say there was a mining bond offered on GLBSE and someone wants insurance that the issuer won't default. The risk can fairly easily be identified. There would likely be a 100% payout if the bond was delisted from GLSBE or trading was stopped and a partial payout if the value of the bond dropped below some specified level, say half its average price around the time of purchase (in case there was a gradual or partial default). These are things that can readily be objectively identified. Time frames can be standardized, 30 days, 90 days, 6 months, 1 year, and people can place bids/asks for particular quantities at particular price points.

A thriving market in this type of insurance would be extremely valuable because it would provide a crowdsourced estimate of the reliability of various issuers and securities.

Which basically evolves it from the idea of using BetsofBitco.in. It gives it the user the same safety as an insurance policy calculated with statistics, but without a lot of the added strings. Not to mention it lets the community determine the risk of an investment, which can give it the same sense of "easy money" associated with the betting and other popular gambling sites. I would personally use this service.

A couple of big concerns come to mind when thinking about a community like this. How large would the user base have to be in order for the service to stay active?

How would the insuring process go?

I imagine something like this:
User1 makes a request for insuring 1BTC
User2 insures User1's request 100% (being 1BTC if their investment fails) @ 50% a year
User1 accepts by sending .5BTC to User1's account
User2 sends 1BTC to an address provided by the service and is provided part one of the privkey. Is also credited the .5BTC
User1 is given part one of the privkey
Depending on the results, part two of the privkey is given to the correct party


If the community interest is there, I am committed to helping make this service happen.

The reason insurance of financials in BTC is impossible (yes, outright impossible) is the anonymity of the currency. The issuer of the insured asset could buy insurance against his own default and you'd never know.

While true, someone would have to provide insurance. As it turns out, 100% insurance is looking unlikely at any reasonable rate.

I would be interested in forming a group and reviewing liabilities.

[legolouman]

I would be interested in forming a group and reviewing liabilities.

That's good to hear. Some people have also PM'd me expressing interest.

Soon, we should all brainstorm and come up with some more polished ideas.