“Because that’s where the money is.”
Apparently bank robber Willie Sutton did not say this, when asked why he robbed banks. But it sounds true, and it explains why Bitcoin exchanges – or ANY repository of large amounts of money – will always be important targets of thieves.
After my last blog post, which concluded that BTC thefts are occurring at a rate about a thousand times higher than US bank robberies, I had a phone conversation with some of my US Deloitte colleagues.
[Ed. Breaking news from Japan this morning: not only are the 740,000 BTC owned by customers missing, but the 110,000 BTC owned by Mt. Gox itself were also stolen. This means the total number of BTC stolen since 2011 rises to a cumulative 1.64 million, or 517,000 per year, which represents an annual theft rate of 4.2% of all Bitcoins currently in circulation.]
We asked the question: aren’t thefts likely to be higher in the early days of any new system with piles of money, real or electronic, lying around? The various safeguards haven’t been perfected yet, and an article from earlier this week says that fraud was a huge problem for another ‘honey pot’ of digital money: the headline “Bitcoin is the new PayPal” tells you everything you need to know!
But we need to note that there are some very big differences between what PayPal experienced and what is happening now with Bitcoin. 1) The magnitude of the losses is much worse with BTC thefts: PayPal was running at about 100 basis points of fraud, and as my last post showed, BTC losses are over 400 basis points a year since 2011. 2) The PayPal frauds were numerous small thefts, not enormous robberies like the $350 million Mt. Gox theft. 3) The losses in the PayPal cases were not generally borne by individuals, but by PayPal and/or the credit card companies. The Bitcoin losses have hit individuals, and the money looks like it is gone forever.
Even if Bitcoin is just going through teething pains the way PayPal did, does that mean theft is a non-issue? I am not sure. Most new technologies have risks, but usually those risks are about the same as whatever it is they are trying to replace, or if they are a bit higher, it is only a bit, and they offer some sort of benefit. This was what PayPal overcame: there were some real challenges in global internet payments, and even though there were some big losses due to fraud, the benefits that PayPal offered were big enough to offset those risks, and gave them time to develop better security. While it is clear that BTC has many advantages, they need to be very large to offset a 400 bps annual loss rate due to theft or fraud! Finally, PayPal was able to work out its problems because they had lots of their own money to throw at the problem. It is not yet clear that the BTC community has the cohesion OR the budget to solve the theft issue.
Back to our bank robbers. What, I wondered, is the historic rate of bank robberies over time? In recent years, as technology has improved, the robbery rate has been dropping like a stone. In Canada, for example, bank robberies are down by almost half since 2000! But the corollary to that trend is that the bank robbery rate was even higher in the 1970s, and then higher again in the 1930s: John Dillinger, Bonnie and Clyde and Pretty Boy Floyd were celebrities! Going back even further, Jesse James and his gang stole $60,000 from a bank in Missouri in 1866. You might think inflation would make that worth $100 million today, but the actual effect is surprisingly small: one dollar in 1866 is worth $14.71 today, or just under $900,000. A lot of money, but still only 0.2% of the Mt. Gox heist.
As another example, Dillinger and his gang engaged in a series of bank robberies in 1933 and 1934. They appear to have robbed 12 banks in 12 months, netting a cumulative $318,000! Which, in today’s money is about $6.8 million: much more than the James-Younger gang got, but still only 2% of the Mt. Gox theft.
Annoyingly, there is no master database of ALL bank robberies over time. And of course the dollar value of all US currency in circulation was much smaller back then. But still…
While it is true that bank robbery rates were much higher when banks and handguns and getaway cars were “novel technologies”, it seem very likely that the bank robbery rate in the past was not much more than 10-20 times higher than today.
So that means that the current rates of Bitcoin robberies are not only 1000 times higher (as a percent of the currency available), but they are also 50-100 times higher than bank robberies have ever been, even when the market was similarly immature. Bitcoin, as a currency, seems remarkably and perhaps unprecedentedly vulnerable to theft.