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March 25, 2014

Untamed Financial Innovation

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 10:27 AM

Flexcoin is the Latest Bitcoin Bank to Bite the Dust [Source: http://www.youtube.com/watch?v=D84Yq7sajNw]

When it comes to the world of entertainment, I enjoy two genres the most: the lavish Bollywood musical and the traditional Western. Both so enjoyable because it's so formulaic. Every movie Western ever made is essentially the same story; it's what happens when an unwilling hero decides, in the name of justice, to go up against those who would do us harm.

That being said, see if you can figure out which Western this storyline is from. I've removed the name so as not to give away the answer:

"On March 2nd ----, [name of bank] was attacked and robbed of all coins. The attacker made off with [amount]... As [name of bank] does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately. [Customers] who put their coins in cold storage will be contacted by [name of bank] and asked to verify their identity. Once identified, cold storage coins will be transferred out free of charge. Cold storage coins were held [not in the vault] and not in reach of the attacker. [Name of bank] will attempt to work with law enforcement to trace the source of the [robbers]."

I know what you're thinking. Did this movie star John Wayne or Clint Eastwood? And did it end with the robbers being hunted down by the sheriff in a climactic shoot-out? Well, excuse me for doing this, but I played a trick on you. The storyline isn't from an old Western but rather a press release from last week. The name of the bank is Flexcoin, a cyber-storagehouse of Bitcoin, and the amount the attackers (or hackers, really) made off with was 896 Bitcoin.

My point in making you think this was a storyline about the 1870s American frontier is that it could very well have been. During that era, bands of thieves ran roughshod over small towns and robbed their banks of all their cash and coins on a regular basis. It was a lawless, untested frontier - not unlike the realm of today's innovative cyber-currencies. And like the Web entities that store and trade Bitcoin, the banks of the Western frontier were initially unable to deal with outside threats to their security.

But then something happened, and it happened very swiftly. Financial services institutions of the late 19th century decided that the cost of not guarding their deposits was greater than hiring a top-notch security firm. The famed Pinkerton guards - a firm that exists to this day - began thwarting bank robbers and put an end to the lawlessness.

Bitcoin might have been dealt some serious blows lately, but it is certainly not the end of its run. True, Flexcoin was robbed blind and the even larger Bitcoin Web site - Mt. Gox - collapsed last week as well. But the markets tended to brush off both events. You read that correctly -- they largely brushed off those two events. Most people who deal in Bitcoin - including a plethora of small businesses and entrepreneurs who enjoy the innovation - seem to think that the latest security breaches simply come with the territory. In fact, many Bitcoin aficionados are saying that the attacks serve as a reminder that more needs to be done in the world of cyber-currencies. They say they must take precautions in order to ensure that hackers can't ruin what looks to be an exciting new way of doing global commerce.

Can you imagine if all the small banks on the Western frontier of the 1870s decided to close up shop, admit defeat, and go home? The banking system would be a lot smaller and a lot less developed in that area of the world. People never would have trusted those firms with their hard-earned deposits, and small businesses and merchants would have had a more difficult time establishing themselves.

That's why it's important for innovators in a new financial services arena to assess what went wrong and to learn from their mistakes. Every financial innovation experiences a period of uneasiness and even speculation. But as it becomes more accepted, you can bet that institutions, businesses, and people will do what they can to ensure that it becomes a safe way to pay for goods and services.

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