BitBeat: BitGo Adds Comprehensive Insurance to Its Services (WSJ)

FEBRUARY 25, 2015, WSJ

Bitcoin security company BitGo has secured a theft insurance policy attached to its proprietary multi-signature wallet protection service, a first for the digital currency industry that could pave the way for companies to provide greater assurances to customers that their bitcoins are safe.

According to an announcement Wednesday, A-rated insurer XL Group will provide comprehensive protection so that any paying BitGo enterprise customer is automatically eligible to insure theft claims up to $250,000 and to increase that coverage by paying a flat 1% fee.

BitGo CEO Will O’Brien said the process took nine months for XL’s examiners to vet BitGo’s “multi-sig” system for bitcoin wallets, which assigns multiple private keys, or passwords, to different entities and so makes it much harder for a hacker to take control of the wallet. Multi-sig systems can be described as a digital equivalent of the dual-key processes used to unlock safety deposit boxes, much like those used at Swiss private banks. In BitGo’s case, its software is marketed to firms such as bitcoin exchanges and digital-currency investment managers and pitched as way to give their retail customers both personal control over their assets and added security.

Unlike other policies secured by wallet providers, which cover the bitcoins themselves, BitGo’s policy from XL essentially insures the technology. Mr. O’Brien argued that this would create a “scalable platform” to help the wider bitcoin industry attract customers who’ve otherwise been leery of the security risks associated with the digital currency.

A string of bitcoin hacking attacks – notably, that which destroyed Tokyo-based exchange Mt. Gox last year and January’s breach at Slovenia-based Bitstamp — as well as associations with criminality, have helped foster an impression of insecurity around bitcoin in the public eye. But those events have also given impetus to BitGo, with the company seeking to establish a set of standards around its model for the industry.  After Bitstamp temporarily ceased operations in January to address the hack on its operational, or “hot,” wallet, it enlisted the help of BitGo to get back up and running with a multi-sig infrastructure.

In designing the XL insurance program, BitGo tapped the services of Ty Sagalow, a 30-year insurance veteran and former chief operating officer of AIG’s e-business risk insurance business who now operates his own consultancy, the Innovation Insurance Group.

Mr. Sagalow described a lengthy process of convincing XL to underwrite an operation in a bitcoin industry that “is not only new but also has a history that would be worrisome to the insurance industry.” But in the end, he said, XL realized the potential and reach of a deal that represents “a watershed event not only for the bitcoin industry but for the insurance industry.”

Other bitcoin service providers have sought to provide in-house assurances to customers of their security of their funds, some of which include promises of insurance.

San Francisco-based wallet and custodial services provider Xapo recently expanded its security operations to upgrade its own proprietary multi-sig process and so-called “deep-cold storage” of the private password keys used to unlock bitcoin transactions. Taking the idea of a “cold wallet” – where the keys are kept offline, away from the prying eyes of hackers – to another level, Xapo uses underground vaults in refurbished nuclear bunkers in Switzerland and other places to store keys on servers that will never touch the Internet and to create a system of transaction execution that leaves no trace of their use in an online setting.

On the strength of this security, Xapo offers its clients insurance. However, its policy is underwritten according to a “captive insurance” model, which limits its liability to the capital that the company itself commits to the coverage.

Other wallet, exchange and custodial services providers that employ sophisticated security protections, including Circle Internet Financial and Coinbase, offer their customers differing degrees of insurance as well. (Michael Casey)