"Online wallet services" are an invitation to fraud and theft

[jimrandomh]

There are a number of "online wallet services" for Bitcoin. The premise is that you send them your coins, and they provide a web-based interface with which to spend your coins. The problem is that these services are acting as banks, but without sufficient auditing, security, or credibility. There are three things that can go wrong with an online wallet service, and they add up to a major risk for anyone keeping money in one.

First, the wallet service might get hacked by a malicious third party. If you keep your bitcoins on your own computer, then they can be stolen if your computer is compromised; if you keep them in an online wallet service, then they can be stolen if *either* your computer is compromised *or* the online wallet service is compromised. And the wallet services are big, obvious targets for attackers.

Second, the wallet service might be doing "fractional reserve"; that is, they may not keep the actual balance on hand to back all their deposits. In this case, everything would seem to be fine until a bunch of people tried to make withdrawals at once, and then they'd discover that there wasn't actually any money there. Regular banks do this, and loan out the extra money; a wallet service could do fractional reserve, but take the extra money as profit. Regular banks have deposit insurance, which is essentially a guarantee by the US government that if everyone tries to withdraw at once and there isn't enough money there, the government will print more to cover the lost balances. In exchange, the bank is subject to a reserve requirement, which is a percentage of all deposits that they have to keep on hand, and audits.

Finally, the wallet service might just steal your money. They could just pack up and disappear one day. Alternatively, a wallet service that wanted to make money this way could keep up pretenses for awhile by disabling accounts a few at a time, or by losing a small fraction of transactions, and by blaming problems on outside attacks.

Seriously, keep your Bitcoins in your own possession. Don't recommend online wallet services to people. And don't expect online wallet services to cover for user-interface or other deficiencies the current Bitcoin client has - those need to be addressed in the client, not by a third-party service.

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[je_bailey]

Speaking as someone who is actively working on setting up an online wallet. I can understand your concerns. It's also our biggest challenge (to build trust)

As someone who is obviously against the idea. What would make you feel more comfortable with the idea?

Actions we are going to take:

1. Make it clear whose behind it.
2. Clarify how our system works and what safe guards are in place
3. How we plan on making money

[Stephen Gornick]

Seriously, keep your Bitcoins in your own possession. Don't recommend online wallet services to people. And don't expect online wallet services to cover for user-interface or other deficiencies the current Bitcoin client has - those need to be addressed in the client, not by a third-party service.

Funny, just minutes after you wrote that is this:
  "I think some centralized service is good for the bitcoin community".
  - http://forum.bitcoin.org/index.php?topic=26264.0

[qikaifu]

Speaking as someone who is actively working on setting up an online wallet. I can understand your concerns. It's also our biggest challenge (to build trust)

As someone who is obviously against the idea. What would make you feel more comfortable with the idea?

Actions we are going to take:

1. Make it clear whose behind it.
2. Clarify how our system works and what safe guards are in place
3. How we plan on making money

For the No.1:

1) Be a U.S. citizen
2) Register a company in U.S.
3) Tell people your exactly background information.
4) Post 1 of your pictures is good for building trust.

conclusion: transfer your personal creditability to your service.

Of course, you have to do a good job on 2. and 3.

[westkybitcoins]

Seriously, keep your Bitcoins in your own possession. Don't recommend online wallet services to people. And don't expect online wallet services to cover for user-interface or other deficiencies the current Bitcoin client has - those need to be addressed in the client, not by a third-party service.

Most of us using this forum are old enough and smart enough to be able to handle risk analysis on our own. We can determine what we consider a safe amount to put into online wallets, and can even point all this out when recommending them to others.

[jimrandomh]

*bump*

I'd just like to point out that MyBitcoin's disappearance was foreseeable, and foreseen. Anyone who kept a significant amount of money there, didn't do their due diligence.

[EhVedadoOAnonimato]

2) Register a company in U.S.

Seriously? You expect bitcoins business to register in a country where the chance of being shut down in the future is that high?

Bitcoin business should be registering in tax havens where money printing is not a tradition.

[smoothie]

*bump*

I'd just like to point out that MyBitcoin's disappearance was foreseeable, and foreseen. Anyone who kept a significant amount of money there, didn't do their due diligence.

Agreed. With this thread being up for close to a month now I would say that anyone who lost bitcoins at mybitcoin.com is at fault for their own losses.

There were too many warning signs of fraud.

Plus it seems contradictory to keep one's wallet/coins on a third party server. The whole idea of bitcoin is to be and decentralized and storing your coins on a central server defeats one of the main beauties of the design of bitcoin.

What a shame....

[the founder]

2) Register a company in U.S.

Seriously? You expect bitcoins business to register in a country where the chance of being shut down in the future is that high?

Bitcoin business should be registering in tax havens where money printing is not a tradition.

We registered where our company is located,  Pottsville, PA USA.    Our clients know who we are,  can verify an address, etc...  considering it's plastered all over there that it's a Yooter InterActive Company.

[twobits]

2) Register a company in U.S.

Seriously? You expect bitcoins business to register in a country where the chance of being shut down in the future is that high?

Bitcoin business should be registering in tax havens where money printing is not a tradition.

We registered where our company is located,  Pottsville, PA USA.    Our clients know who we are,  can verify an address, etc...  considering it's plastered all over there that it's a Yooter InterActive Company.

I want to be able to buy Yuengling for bitcoins.

[the founder]

I want to be able to buy Yuengling for bitcoins.
[/quote]

the brewery is across the street.. literally smell hops each time I go to work.

[westkybitcoins]

*bump*

I'd just like to point out that MyBitcoin's disappearance was foreseeable, and foreseen. Anyone who kept a significant amount of money there, didn't do their due diligence.

Exactly.

Side note: I can't help but wonder why so many people seemed to prefer mybitcoin over instawallet. Because it had a password? Both were e-wallets, and not worth keeping a lot of bitcoins in.

[EhVedadoOAnonimato]

We registered where our company is located,  Pottsville, PA USA.

I wish you and all your customers good luck.

[wumpus]

Speaking as someone who is actively working on setting up an online wallet. I can understand your concerns. It's also our biggest challenge (to build trust)

As someone who is obviously against the idea. What would make you feel more comfortable with the idea?

Would offering wallet.dat download (or alternatively, a gpg-encoded text file with private keys) by a good idea? So that even if your site goes offline - for example, if your servers are nuked or taken - I still have the private keys for my own addresses and can use them in a local client, and spend the coins.

This won't help against you purposeful stealing the coins, but will give reassurance against loss or destruction.

[dogisland]

Speaking as someone who is actively working on setting up an online wallet. I can understand your concerns. It's also our biggest challenge (to build trust)

As someone who is obviously against the idea. What would make you feel more comfortable with the idea?

Assuming you're an honest individual I can still forsee the following problems.

1. How can you protect the bitcoin private keys in the wallet from...

a. Disgruntled employees (assuming you'll need employees)
b. Someone at the data center where your servers are hosted.
c. The backups you'll need to make. Who holds these ?

2. You're going to be constantly under cyber attack.

a. Who examines your code ?
b. Your software stack i.e. the 3rd party libraries you use how will you check that no-one inserts a specific attack on your site via a library upgrade.
c. How about your personal computers a hacker could gain access and use a keylogger to get root passwords ?

3. If you do well you'll be holding a significant amount of cash for other people that can easily be transferred and anonymized. You've also made yourself public on your site.

It's possible someone could attack you personally to get at the bitcoins. Have you thought about that ?

[wumpus]

It might also be interesting to make a personal wallet webservice for micro-payments. Only allow a certain maximum BTC per user, so that it is not used as long-term storage for large amounts of coins.

Users should then be actively encouraged to only use the service for web payments.

This will limit the risk a bit...

[defxor]

What would make you feel more comfortable with the idea?

Not giving you my private keys for storage, but using the data stored with you together with my local secret every time a key is needed.

This would be similar to how LastPass handles passwords (they're not stored with them, yet it's "like" if they were) and give the same security as Wuala has over Dropbox (employees cannot, ever, see your content).

[wumpus]

Not giving you my private keys for storage, but using the data stored with you together with my local secret every time a key is needed.

But how would you see that work with a web service? You could implement a large part of the Bitcoin protocol in JS, but if it is served from the wallet provider, it could steal any key that you enter by injecting a keylogger into the JS as well.

It could work with the native clients though, to have it use a wallet on a storage provider (with encrypted private keys) instead of a local one. Would be a matter of generalizing the DB backend. This would also protect against wallet loss if the local machine is formatted.

[defxor]

Not giving you my private keys for storage, but using the data stored with you together with my local secret every time a key is needed.

But how would you see that work with a web service? You could implement a large part of the Bitcoin protocol in JS, but if it is served from the wallet provider, it could steal any key that you enter by injecting a keylogger into the JS as well.

That's the most common argument leveraged against LastPass, and it's indeed valid (see below). The solution, so far not implemented anywhere, is to sign a hash of the JS snippet in question and have that verified by the client. When the code needs an update it has to be vetted before clients approve a new hash or signature.

I believe this is on its way into the HTML specifications but I haven't looked for some time. If we control the client implementation (Android, PCs) it's however implementable already today.



In the LastPass case, they are considered trusted (reputation, company) and the architecture is meant to protect against hacking instead. They take great care to make sure their systems serving up the JS in question aren't easily manipulated, and if a hacker were to extract their databases they still cannot do anything with them since everything is encrypted and only the end users have the corresponding keys.

[Vandroiy]

Where can one get a security architect for this kind of job?

I thought Microsoft has depleted the supply by dragging all the good people into the Midori project...

Seriously, someone who can manage a 100.0% flawless system for all the running time -- those people are rare to come by. One contact of the private keys with a hacker, and your entire company is history. And possibly the responsible people as well, if the amount of value lost was high enough for people to get violent.