We are bitcoin skeptics here at BU, so we are not surprised at all to learn that another bitcoin “bank” shut down yesterday after a hack of its “hot wallet” resulted in the theft of some $600,000 worth of the virtual currency. Customers who lost their bitcoins have no recourse to recover them:
People who paid Flexcoin a special fee to keep their bitcoins safe in an offline “cold storage” will be able to get their bitcoins back, as the thief wasn’t able to get to those coins. Flexcoin said it will contact anyone who had bitcoins in cold storage and give them their coins back free of charge.
Customers with bitcoins in the bank’s “hot wallet” won’t be so lucky: Flexcoin directed those customers to its Terms of Service page, which states that “Flexcoin Inc is not responsible for insuring any bitcoins stored in the Flexcoin system.” Anyone who used Flexcoin agreed “to not hold Flexcoin Inc, or Flexcoin Inc’s stakeholders, or Flexcoin Inc’s shareholders liable for any lost bitcoins,” the Terms of Service page states
Flexcoin had marketed themselves as the website that “solved bitcoin’s problems,” including security. But it is extremely difficult for any website to make up for the innate problems of a virtual currency that simply encourages criminal activity. Not only are bitcoins often created by stealing computer power, they are easily stolen once they have been mined, and then they are completely untraceable. Government regulation could help alleviate these issues and put a prop under the value of bitcoin, but the wealthy libertarians behind the bitcoin craze are not inclined to swallow that tonic. Warren Buffett dismissed the investment potential of bitcoins this weekend, and we see no reason to second-guess him.