i.e. Dwolla, Balanced, Stripe, Venmo, all serve as intermediaries for moving money - do these companies have bank accounts that hold onto massive sums of money? What protections would go into keep those accounts secure?
Bitcoin and other digital currencies are learning firsthand what it means to "disrupt" on this scale. Part of that is learning the hard way what the old industry has known since before any of us were born.
Bitcoin has the problem of having irreversible transactions, and it's also a lot more difficult to determine whether or not an account has been legitimately stolen from.
I don't think it's the case that the current banking industry is insulated from theft due to superior security. From what I've heard from programmers working in the financial industry, the software there can be quite ropey, or at least no better than anywhere else.
Irreversible, unregulated, software-driven money at the consumer level is a thief's wet dream. It's even more appealing than cash. Money can be stolen from halfway across the globe, anonymously. Digital currencies face security challenges that go far beyond those of the fiat currency so many people despise.
Besides the theft problem, there's the crime problem. Digital currency is extremely convenient for high-dollar criminals like international drug and arms dealers. They're the first big customers, while mainstream businesses lag far, far behind in their own cautious way. This makes governments even more hostile, and civilians as well. And a currency that isn't accepted by the vast majority of legitimate businesses is not terribly useful.
But to your other point... yeah, banking software is not necessarily a paragon of security, any more than any other big enterprise software. But consumer-facing parts are generally fairly limited in scope (worst breach I know of is the recent Target breach), and the really big-money parts are hidden well away from the world and buried under many layers of process as well as software security.
To me, one of the more interesting results of Bitcoin is how critical information security is to the businesses that deal in it, and how a flaw in their security can make companies vanish overnight. It really provides some darwinian pressure to get security right!
Short the exchange rate + significant DDOS attack on the exchanges = millions in free money. That's just a for example. It doesn't even require explicit crime on the bitcoins themselves, and can be done at a safe remove through multiple cutouts. (Historical point of comparison - shell companies were used to short airline stock just before 9/11, resulting in tremendous windfall profits for presumably close allies of the perpetrators)
You could make similar arguments about security on the internet compared to physical security in the real world. The recent Target credit card theft, for instance - it's unlikely that the thieves could have appropriated 40 million credit card numbers by physically taking them!
> Short the exchange rate + significant DDOS attack on the exchanges = millions in free money. That's just a for example. It doesn't even require explicit crime on the bitcoins themselves, and can be done at a safe remove through multiple cutouts.
Sure, but you could achieve a similar effect by attacking an internet retailer and shorting their stock. It's also a lot easier to short stock, which is a shame, as shorting typically reduces price volatility.
The reversibility of transactions has drawbacks (one that's of interest to me is that it serves as one motivation for reducing privacy and increasing data retention).
Dwolla, Inc. is an agent of Veridian Credit Union and all funds associated with your account in the Dwolla network are held in a pooled account at Veridian Credit Union. These funds are not eligible for individual insurance, and may not be eligible for share insurance by the National Credit Union Share Insurance Fund. Dwolla, Inc. is the operator of a software platform that communicates user instructions for funds transfers to Veridian Credit Union.
The solution the industry has is not to hold cash.
Since no one has money, and all the banks have insurance, they just reverse the transactions in 90% of cases, and in the other 10, like ATM fraud, use insurance. But seriously, go to a bank and try to withdraw $90K in cash.
Also, if you make off with 90K in cash the finance industry has people with guns to go and get the cash back.
This chart is old (1992) but gives an indication of the amount of money in a bank vault:
Quite a lot of banks will simply say "no,
not with any amount of paperwork"
"Suspicious Transaction Reports" or "Currency Transaction Reports" only take a few minutes at most and can be completed online. The AML threshold applies whether you're using cash or a check, so you're basically saying that banks won't deal with transactions over $10,000 which is absurd.
Nearly every bank and credit union has a 'Large Cash Withdrawal' policy that merely requires ~7 days' notice prior to the withdrawal so that they can order the cash. It also of course waives their liability if you lose that cash or get robbed, but that's to be expected.
See exactly how much paperwork you end up doing for the next 10 years of your life.
If the bank itself collapses the FDIC insures my deposits.
Then again if my drug dealer steals all my money I am shit out of luck, much like all the users of this site. I guess it isn't that different at all.
The transaction is reversed and the money comes back from the merchant it was sent to, your bank doesn't absorb any loss. The only victims of credit card fraud are the stores, not the consumers, not the banks, and not the unauthorized user of the card. Nobody who should have actual liability is actually punished in any way, just innocent retailers, for the most part.
(Likely more to the point: it's probably harder to clean out your own liquor store and claim robbers did it.)