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Five Ways to Fix Bitcoin

Stocks in this article: GLD IAU SGOL

NEW YORK (TheStreet) -- Bitcoin, the crypto currency held by thousands of Internet users, frustrates police and bankers alike who can't make heads or tails of a payment system that exists beyond government or regulatory control.

Last week the European Union warned that holdings in the online currency -- each unit, or bit coin, has a value of about $1,000 -- may be swiped by hackers or subject to confiscation by law enforcement agencies.

"Currently, no specific protection exists in the E.U. that would protect consumers from financial losses," reported the European Banking Authority, especially "if a platform that exchanges or holds currencies fails or goes out of business." The banking authority reported cases of "consumers losing significant amounts of virtual currency with little prospect of having it returned."

Senate hearings last month drove home the risks, noting the potential for money laundering and theft: Millions in converted hard dollars are known to have been pilfered from so-called "digital wallets." 

Indeed some businesses which provide tools to trade in bitcoins have gone to extraordinary lengths to protect their assets. The latest, Coinbase, keeps the bulk of its tens of millions in bitcoin holdings in safety deposit boxes offline and requires the printing of special cryptographic keys in order to use to the cash. "Cold storage helps us sleep at night," says the company's CEO.

Adding to the risks is the fluctuating value of the currency, which wavered from $5 per unit to more than $1,200.  (Bitcoin's biggest runup took place in the wake of the Cyprus banking crisis in which regulators foisted the cost of bank bail-outs -- some call them bank "bail-ins" -- on large debt holders, shareholders and bank depositors. The unhappy depositors, seeking money protection absent government oversight, plowed billions in hard cash into the digital currency. See Joe Deaux's take from goldbugs.)

So how can Bitcoin keep regulators at bay and investors happy, while shutting out hackers and money launderers?

Here are five ways:

  • The operators of Bitcoin should consider backing the currency with something relatively stable, say the value of gold or silver bullion. Ingots of the stuff could be kept in large vaults under the streets of money centers like Wall Street. The assets would be tightly guarded and inaccessible to hackers.
  • Instead of issuing virtual bucks, print the currency on sheets of paper. Paper cannot be hacked. It can be stored safely offline, and is portable.
  • Select images for those bitcoin printings that convey respect and prestige globally, perhaps the portraits of American presidents.
  • Establish international exchange rates so the worth of bitcoins would be known and fixed from place to place.
  • Lastly allow the holders of "virtual wallets" to convert their assets to printed bills which could then be folded into actual wallets and spent anywhere.

-- By William Inman  

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